BOJ's Funo urges continued easing as inflation still weak

By Tetsushi Kajimoto

SENDAI, Japan (Reuters) - Bank of Japan board member Yukitoshi Funo said on Thursday that the central bank needs to patiently continue its strong monetary easing under the current policy, as slowing inflation keeps the BOJ's 2 percent price target a distant objective.

Funo made the comments a week after the BOJ cut its inflation assessment, reinforcing market expectations that the central bank will not begin tapering its heavy stimulus anytime soon.

Funo told a news conference in Sendai, northeastern Japan, that the central bank will adjust policy as necessary.

The BOJ's nine-member board is expected to step up its debate on why Japanese inflation remains stubbornly subdued, when it meets next month to give long-term economic and price projections.

Funo saw recent weak inflation as temporary, but added that structural factors such as the advance of Internet shopping and stiff competition among mass-merchandise retailers could keep a lid on price growth.

"Prices remain weak. Risks that prices, centring on medium- to long-term inflation expectations, deviate downwards are large," Funo said earlier in a speech to business leaders in Sendai. "It warrants attention."

The BOJ kept its short-term interest rate target at minus 0.1 percent last Friday and affirmed a pledge to guide 10-year government bond yields around zero percent.

Core consumer prices in April rose 0.7 percent from a year earlier, slowing for the second straight month and continuing to cast doubt on the BOJ's view inflation is on track to meet its target.

STRUCTURAL FACTORS

Funo said that inflation may not pick up even if the output gap improves further because competition in goods and services that are difficult to differentiate could intensify.

The output gap measures the difference between the economy's actual output versus what is seen as its maximum potential and is closely watched by central banks.

Funo added that households and corporations will be less confident about the inflation outlook if firms remain cautious in their wage- and price-setting practices.

The policymaker said he saw no major risks of prolonged low interest rates destabilising the financial systems.

"Funo sounded somewhat dovish as he made no mention of the need to adjust interest rates," said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

"The BOJ is likely to lower its inflation projections at the July policy meeting and move risk scenario on prices as a main scenario."

Funo, a former Toyota Motor executive, has consistently voted with the majority of the BOJ's nine-member board, including the 2016 shift of policy focus to targeting interest rates from increasing the money supply.

He flagged risks such as U.S. economic policy and uncertainty over trade policies in each country, even as the global economy grows steadily.

"A rise in protectionism is a risk that could affect the global economy and trade volumes. I am closely watching with a sense of worry," Funo told a news conference.

"As Japan's economy is founded on global trade, emerging of protectionism in the global economy is a risk that may affect us."

(Reporting by Tetsushi Kajimoto; Editing by Chris Gallagher, Eric Meijer & Shri Navaratnam)