By Leika Kihara and Yoshifumi Takemoto
TOKYO (Reuters) -A panel of academics and business executives on Monday urged the Bank of Japan (BOJ) to make its 2% inflation target a long-term goal instead of one that must be met as soon as possible, in light of the rising cost of prolonged monetary easing.
The re-defining of the price target must be made in a new policy accord between the government and the central bank that would replace the one crafted in 2013, the panel said.
In the proposal, the panel also called for the need to have interest rates rise more in line with economic fundamentals, and normalise Japan's bond market function.
"The way the BOJ conducts monetary policy must be revamped," Yuri Okina, a panel member who is considered as among candidates to become the next BOJ deputy governor, told a news conference.
"By making 2% inflation a long-term goal, the BOJ can make its monetary policy more flexible," she said.
With rising raw material costs pushing up inflation well above its 2% target, the BOJ has seen its ultra-loose policy come under attack by investors betting it will hike interest rates when Governor Haruhiko Kuroda's second, five-year term ends in April, and those of his two deputies in March.
Nobuyuki Hirano, former president of MUFG Bank and member of the panel, said the BOJ's yield control policy has become unsustainable, as it is causing big distortions in the yield curve and making the bond market dysfunctional.
"Given such distortions, we must correct the BOJ's policy into one that is more flexible," Hirano told the news conference. "It's too dangerous to keep going this way."
In parliament on Monday, Kuroda reiterated the importance of maintaining ultra-loose monetary policy.
"Uncertainty regarding Japan's economy is extremely high. It's therefore important now to support the economy, and create an environment where companies can raise wages," he said.
"Japan has yet to foresee inflation stably and sustainably achieve our 2% inflation target, backed by wage hikes," Kuroda said. "As such, we must maintain our 2% inflation target and our ultra-loose monetary policy."
Under strong political pressure to beat deflation, the BOJ signed a policy accord with the government in 2013 and committed to achieving 2% inflation "at the earliest date possible."
With inflation exceeding the BOJ's target, critics say the current accord has become outdated and is preventing the BOJ from phasing out its massive stimulus programme.
Given recent public complaints over rising inflation, Prime Minister Fumio Kishida, who will choose the next BOJ governor, has signalled the chance of revising the policy accord under Kuroda's successor.
The panel consisted of about 100 academics, business executives and labour union officials, including those who are members of key government councils.
Kishida delivered a speech at one of the panel's meetings in October, a sign of the influence its proposals have on the government's economic policy.