Bank of Japan's Funo calls for strong easing to hit two percent inflation as prices weak

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 framework, underscoring the BOJ’s resolve to hit its 2 percent inflation target.

“Prices remain weak. Risks that prices, centering on medium- to long-term inflation expectations, deviate downwards are large. It warrants attention,” Funo said in a speech to business leaders in Sendai, northeastern Japan.

Momentum towards the BOJ’s price target is “in place” but 2 percent inflation remains a distant goal, he added, echoing the views of Governor Haruhiko Kuroda.

Funo’s comments came a week after the BOJ cut its inflation assessment in a fresh setback for its price stability program, reinforcing opinion that the central bank will not begin tapering off heavy stimulus anytime soon.

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

Kuroda, acknowledging that recent price moves have been somewhat weak, has said his board will deepen debate on the factors behind subdued inflation at next month’s policy meeting.

Funo said price growth was likely to converge towards 2 percent given the BOJ’s strong commitment to easy money policy.

Funo noted, however, 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 growth in inflation expectations at households and corporations could be delayed if it took a long time for firms to become more positive in their wage- and price-setting practices.

The policymaker said he saw no major risks of prolonged low interest rates causing financial intermediation to stall and destabilize financial systems.

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.