Suda Says BOJ Shouldn't Be Complacent About Inflation

By Lily Nonomiya

Aug. 28 (Bloomberg) -- Bank of Japan board member Miyako Suda said containing inflation is ``key'' to sustaining the economy's expansion, suggesting she's more concerned about rising prices than her colleagues.

``While the Japanese economy is in a sluggish state, containing inflation is key to sustaining economic growth,'' Suda told business executives today in Kanazawa, central Japan. ``Given that global monetary conditions have been accommodative, inflation is rising around the world, and that's clearly causing inflationary expectations of people and companies to rise.''

Suda, who along with two colleagues unsuccessfully voted for an interest-rate increase in January 2007, told reporters that the central bank should raise the key rate from 0.5 percent ``a little early, when there's more room to maneuver.'' The bank last week described growth as ``sluggish'' for the first time in a decade, signaling it's unlikely to tighten credit anytime soon.

``Suda keeps sending her message that the central bank should raise rates without delay once the bank becomes confident about the economy picking up,'' said Mari Iwashita, chief market economist at Daiwa Securities SMBC in Tokyo. ``She's been the most hawkish member of the board and today's comment suggests she's playing that role.''

The yen traded at 108.97 per dollar as of 3:14 p.m. in Tokyo from 109.47 shortly before Suda's remarks were released to the media. The yield on Japan's 10-year bond fell 1.5 basis points to 1.415 percent.

`Reasonably Confident'

The bank should raise rates ``when we become reasonably confident that conditions are picking up,'' Suda said at the press conference after the speech. Waiting until ``a state where multiple rate increases would be necessary should be avoided.''

Higher prices will eventually cause wage growth to pick up, Suda said, in contrast with Governor Masaaki Shirakawa, who this week cited ``weak'' pay as a reason why inflation hasn't spread from fuel and food products.

``Should the passing on of raw-materials costs continue and consumer prices keep rising, wage growth will eventually pick up, causing the synergy between wages and the inflation rate to become stronger,'' Suda said. Paychecks rose only 0.4 percent in June, running at about a fifth of the pace of consumer prices.

Suda, the sole woman and longest-serving member of the board, is ``one of the most independent'' policy makers at the bank given that she has voted against the majority before, said Takuji Okubo, a senior economist at Merrill Lynch & Co. in Tokyo.

The bank needs to watch inflationary expectations because a prolonged increase in prices of gasoline, food and other daily necessities has caused people to perceive that prices are rising more than the benchmark inflation rate, Suda said in the speech.

Can't Let Guard Down

``Just because international commodity markets are in an adjustment phase, we can't let down our guard against inflationary risks,'' she said. Crude oil has fallen 18 percent since exceeding $147 a barrel for the first time on July 11.

Consumers expect prices to be 9 percent higher by June 2009, according to a central bank survey released last month. Consumer prices excluding fresh fruit, fish and vegetables, the bank's preferred gauge of inflation, rose 1.9 percent in June from a year earlier. Excluding food and energy, prices rose 0.1 percent.

Suda reiterated Shirakawa's comments that Japan wouldn't experience an abrupt downturn as it did in 1998 and 2001 because the economy isn't burdened with excess inventory and capacity. Still, she added, global financial-market volatility and developments in overseas economies were clouding the outlook and the Bank of Japan should be flexible when setting policy.

`Uncertainty Persists'

``A high amount of uncertainty persists when it comes to predicting the outlook for the economy and prices,'' Suda said. ``We will implement monetary policy flexibly by carefully examining both upside and downside risks.''

The bank shelved its two-year policy of calling for tighter credit in April, the month Shirakawa assumed the bank's top position. Borrowing costs will stay unchanged through next June at least, according to 21 of 26 economists surveyed by Bloomberg this month. Four estimated higher rates and one predicted a cut.

Japan's economy shrank at an annual 2.4 percent pace in the second quarter, putting it on the brink of a recession. Reports tomorrow will probably show inflation accelerated as the economy continued to weaken.

Core inflation probably exceeded 2 percent for the first time in a decade in July, economists expect. Factory production probably fell for a second month and household spending likely declined for a fifth month.

To contact the reporter on this story: Lily Nonomiya in Kanazawa at lnonomiya@bloomberg.net