By Dan Burns
NEW YORK (Reuters) -Bank of Japan Governor Haruhiko Kuroda said on Friday the central bank should "persistently" continue with its current aggressive monetary easing, despite an expected temporary rise in inflation driven by surging commodity costs.
Japan's inflation is expected to rise in the short run, but such a rise consists primarily of cost-push inflation and therefore lacks sustainability, Kuroda said.
"The output gap in Japan is negative, and there is still a long way to go to achieve the 2% target in a stable manner," Kuroda said in a speech delivered at Columbia University, referring to the BOJ's 2% inflation target.
"The Bank's role in the current context is perfectly clear: to persistently continue with the current monetary easing centered on yield curve control," he said.
While Japan's consumer inflation may accelerate to around 2% from April due to one-off factors, the upward price pressure has not been as widespread as in the United States due to weak growth in services prices, Kuroda said.
If the increase in commodity prices heightens inflation expectations and triggers an unwelcome spike in wages, central banks need to tighten monetary policy, as is the case in the United States, Kuroda said.
"However, in Japan, it is unlikely that the current rise in commodity prices due to supply factors will immediately lead to a sustained rise in wages and prices," he said.
Citing Japan's negative output gap, Kuroda said there is no concern over an overheating of the economy.
"Given the developments in Japan's economy, it is necessary and appropriate for the Bank to continue with monetary easing and thereby firmly support the economy," he said.
The BOJ has pledged to maintain ultra-loose policy even as other central banks have started to tighten monetary settings, arguing that Japan's sticky deflationary mindset will prevent prices from rising much soon.
Japan has seen consumer inflation accelerate only moderately after being mired in two decades of grinding deflation. Core annual consumer prices rose just 0.6% in February - well below the BOJ's 2% target.
But core consumer inflation is expected to accelerate to around 2% from April due to rising fuel costs and the dissipating impact of past cellphone fee cuts.
The BOJ is likely to raise its inflation forecast for this fiscal year to near 2% at next week's policy meeting as global commodity inflation drives up energy and food costs, sources have told Reuters.
Still, inflation expectations in Japan appear to still be reasonably anchored, Kuroda said. While there has been some indication of short-term inflation expectations edging up, medium-to-long-term inflation expectations do not show any significant upward momentum.
The BOJ chief also said he did not think it was likely that a wage-price spiral dynamic would develop in Japan as some argue it has in the United States.