BOJ says ready to act if tax hike threatens price goal

Thu Sep 5, 2013 5:34am EDT
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By Leika Kihara and Stanley White

TOKYO (Reuters) - The Bank of Japan said the world's third-largest economy is recovering and signaled it would increase its huge stimulus only if a planned sales tax hike was to threaten its goal of lifting inflation to 2 percent in two years.

Governor Haruhiko Kuroda said on Thursday there was no need to ease policy further now after a slew of data saw the central bank declare the economy is recovering, its most upbeat view since March 2008, before the global financial crisis.

He called on the government to proceed with the two-stage doubling of the sales tax, saying it would not derail the economy and warning that there was little fiscal and monetary policy could do once trust in Japan's finances was lost.

"It's uncertain how government bond and stock prices would react if the sales tax hike were to be delayed," Kuroda told a news conference after the BOJ's policy meeting.

"But if trust in Japan's finances is lost as a result and lead to a sharp fall in bond prices, there's no choice but to tighten fiscal policy. It's also very hard to deal with such a situation with monetary policy too," he said.

Easing the pain on the economy from the tax hike should be easier because policymakers only need to loosen fiscal and monetary stimulus further, Kuroda added.

"Even if the sales tax is raised as scheduled, we don't expect the economy to falter," he said. "If risks materialize and threaten our 2 percent inflation target, we of course will respond appropriately."

As widely expected, the central bank voted unanimously on Thursday to maintain its April pledge to increase base money, or cash and deposits at the central bank, at an annual pace of 60 trillion yen ($603 billion) to 70 trillion yen.   Continued...

A man uses a mobile phone inside at a coffee shop in Tokyo September 5, 2013. The Bank of Japan kept monetary policy steady on Thursday and revised up its assessment of the economy, encouraged by growing signs the benefits of its stimulus policy are broadening. REUTERS/Yuya Shino