BOJ won't hesitate to ease if emerging market slowdown hurts inflation trend: Iwata

BOJ won't hesitate to ease if emerging market slowdown hurts inflation trend: Iwata

Issei Kato

OKAYAMA, Japan (Reuters) - The Bank of Japan (BOJ) is prepared to ease monetary policy again if further deterioration in emerging economies hurts a broad uptrend in Japanese inflation, Deputy Governor Kikuo Iwata said on Wednesday.

Iwata voiced confidence that Japan's economy is on track to achieve the central bank's 2 percent inflation target and blamed recent declines in consumer prices largely on slumping energy costs.

A tightening job market will push up wages and underpin household spending, while companies are seen using their record corporate profits on capital expenditure, he said.

But the former academic warned that there were "strong downside risks" on the outlook for exports and output, given slowing growth and excess slack among emerging economies.

"The most significant risk at the moment is the possibility that a further slowdown in emerging economies ... will exert negative effects on Japan's economy and weigh on the underlying trend in inflation," Iwata said in a speech to business leaders in Okayama, western Japan.

"If such risks materialize and threaten the underlying trend in inflation, the BOJ will adjust policy without hesitation."

Iwata said the BOJ can keep policy unchanged for now since the chance of such risks heightening sharply was low in the near future.

While oil price declines will weigh on inflation in the short-term, they will help accelerate inflation in the long run by boosting economic growth for a country such as Japan that relies heavily on energy imports, he said.

"It's a shared understanding among major central banks to accept a delay in achieving their price targets if it is due to oil price fluctuations," Iwata told a news conference later in the day.

The BOJ has kept monetary policy steady since expanding its massive stimulus program in October last year, even as the economy relapsed into recession and slumping energy costs push inflation further away from its 2 percent target.

Iwata, an architect of the current stimulus program targeting base money, has been among those in the board who share Governor Haruhiko Kuroda's optimism on the prospects for hitting 2 percent inflation.

"I expect to see clearer signs of a positive cycle - in which increases in capital expenditure and consumer spending narrow the output gap and gradually push up inflation - emerge ahead," Iwata said.

The BOJ has pushed back the timing for hitting its price target and now expects inflation to hit 2 percent by around early 2017.

Many analysts believe inflation won't accelerate so quickly given tame wage growth. Some see the possibility of further monetary easing as early as January, when the BOJ next reviews its quarterly growth and price forecasts.

(Editing by Chris Gallagher, Sam Holmes & Kim Coghill)