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BOJ'S Shirai sees Japan inflation rising, wage increases key

A pedestrian waits to cross the road in front of the Bank of Japan headquarters in Tokyo, Japan.

[SAN FRANCISCO] Japanese inflation will likely rise in the near future so long as oil prices don't fall further, Bank of Japan board member Sayuri Shirai said on Friday, but higher wage growth remains key to reaching the central bank's inflation goal.

Long-term inflation expectations in Japan are only about half the BOJ's 2 per cent inflation goal, Shirai noted in remarks prepared for delivery to the San Francisco Fed's biannual conference on Asian economic policy. "This suggests a need to generate a further increase in inflation expectations in Japan," she said.

Japanese households and financial institutions have gradually been taking on more "healthy" risk since the Bank of Japan began massive monetary easing in 2013, she said. "It is important that the BOJ continue to support these positive developments by maintaining an accommodative monetary environment," she said.

Households need to see consistent wage increases before they will tolerate rising prices, which would in turn help boost inflation toward the 2 per cent target, said Shirai, a former IMF economist who is more pessimistic about price prospects than some others on the board.

But Japanese households, she said, generally expect higher inflation than what is actually experienced, as well as decline in future income.

"It will be important for the BOJ to promote public understanding that its objective is to achieve a moderate price rise associated with a wage hike and a sustainable increase in household spending, to improve households' tolerance to price rises," she said.