BOJ policymaker calls for resuming rate hikes after temporary pause

By Leika Kihara and Takahiko Wada

TOKYO/TSU, Japan (Reuters) -The Bank of Japan should resume interest rate hikes following a temporary pause to evaluate the impact of U.S. tariffs, board member Hajime Takata said, signalling optimism the country was on track to durably achieve the central bank's price goal.

Takata said Japan was close to achieving the BOJ's 2% inflation target with robust corporate profits and labour shortages driving up wages and building price pressures.

While the BOJ must take its time scrutinising the fallout from U.S. tariffs, it may need to "nimbly" shift back to rate hikes in response to any changes to U.S. policies, he said.

"My view is that the BOJ is currently only pausing its policy interest rate hike cycle, and should continue to make a gear shift (from ultra-loose monetary policy) after a certain period of 'wait and see'", Takata said in a speech on Thursday.

"Given uncertainties regarding various U.S. policies remain high, the BOJ must conduct monetary policy in a more flexible manner without being too pessimistic," he said.

The remarks by Takata, who is viewed by markets as taking a neutral to slightly hawkish stance on monetary policy, highlight the BOJ's resolve to resume rate hikes once there is more clarity on whether the economy can weather the hit from U.S. tariffs.

But Takata offered few clues on the timing of the BOJ's next rate hike, saying it was hard to predict when Japan could clear the threshold for another increase until there is more clarity over U.S. trade developments.

While the BOJ and many international institutions have cut growth forecasts taking into account the expected hit from U.S. tariffs, the effect of Trump's deregulation and tax cut plans on the U.S. economy remains unclear, Takata said.

"We can't say now with any pre-set idea," Takata said when asked about the chance of another rate hike his year.

TRUE DAWN APPROACHING

The BOJ ended a massive stimulus last year and in January raised short-term rates to 0.5%. While the central bank has signalled readiness to raise rates further, the expected impact of U.S. levies forced it to cut its growth forecasts in May.

Takata said Japan was making further progress towards durably hitting the BOJ's price target. Medium- and long-term inflation expectations continue to heighten steadily due not just to rising raw material costs but wage hikes, he said, adding that Japan is finally seeing signs of home-made inflation - a prerequisite for rate hikes.

But he warned of the huge stress Japan's economy was facing from external factors, adding that he wanted to assess whether higher U.S. duties could hurt exports, capital expenditure and corporate appetite to continue wage hikes.

If the U.S. Federal Reserve were to cut interest rates to support the economy, the divergence between the BOJ's rate-hike bias and the Fed's easing could push up the yen and hit corporate profits, he added.

In the long run, the hit to Japan's economy from U.S. tariffs will likely be limited compared with the bilateral trade friction in the 1990s as Trump's levies target a wide range of countries - not just Japan, Takata said in the speech.

With firms now more keen to raise prices and wages, Japan is breaking free from a long-held view among society that inflation and wage growth will remain stagnant, Takata said.

"Japan's economy ended up experiencing several 'false dawns,' or temporary economic recoveries, interrupted by global demand shocks. My expectation is that Japan will see a 'true dawn' this time," Takata said.

"I believe the BOJ should gradually and cautiously shift gears in its monetary policy," based on the view the economy was ready for a full withdrawal of an unconventional easing programme.

(Reporting by Leika Kihara and Takahiko Wada; Editing by Shri Navaratnam and Christopher Cushing)