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Japan shouldn't exaggerate pain from tax hike: BOJ policymaker

A pedestrian holding an umbrella walks past the Bank of Japan headquarters in Tokyo August 8, 2013. REUTERS/Yuya Shino

By Leika Kihara

AOMORI, Japan (Reuters) - Policymakers should not overreact to any blip in the economy from an expected sales tax hike next year, a Bank of Japan board member said, suggesting that no additional monetary stimulus is required as long as the downturn is short-lived.

Prime Minister Shinzo Abe on Tuesday ordered his government to craft measures to bolster the economy to cushion the impact of an increase in the sales tax. He is likely to formally decide early next month on implementing the tax.

A recent slew of positive economic data has heightened views the economy can weather the pain from the tax hike, although some market players say the central bank may come under pressure to loosen monetary policy further to soften the blow.

If the sales tax is increased in April, there will be a rush in consumer spending prior to then, followed by a slump which, taken together, will be neutral for the economy, BOJ board member Koji Ishida said on Wednesday.

"If we exaggerate the reactionary economic slump, it may affect public expectations and hurt sentiment. We should react calmly (to any such blip)," Ishida told a news conference after meeting business leaders in Aomori, northern Japan.

"We'll of course take preventative steps if the damage from the slump broadens ... Otherwise, we should respond calmly," he said, suggesting that further monetary easing would be required only if the shock from the tax hike is big and lasting enough to threaten efforts to end deflation.

The BOJ launched an intense burst of monetary stimulus in April, pledging to double the base money via asset purchases to achieve its 2 percent inflation target in roughly two years. It has stood pat on policy since then.

EXPORT PICKUP NEEDED

If Abe decides to proceed as scheduled, Japan will see the sales tax rise to 8 percent from 5 percent on April 1, and to 10 percent in October 2015. The premier is proceeding cautiously as many politicians blame the last tax hike, in 1997, for plunging the country into recession.

Ishida stuck to the central bank's assessment that the economy was recovering moderately, pointing to the resilience in personal consumption. But he warned a slow increase in exports is discouraging companies from boosting capital expenditure and weighing on factory output.

"Most of Japan's past economic recoveries were driven by exports," the former commercial banker told business leaders.

"The recovery now is spurred by domestic demand such as personal consumption, housing investment and public works spending, but exports must start to act as driving force."

Japan's economy expanded at an annualized 3.8 percent in the June quarter, a third straight quarter of growth, as the feel-good mood generated by Abe's reflationary policies lift household and corporate spending.

IMPROVED BUSINESS SENTIMENT

Big manufacturers' business sentiment hit a record high in July-September, a government survey showed on Wednesday, as auto and electronic makers enjoy the benefits of a weak yen that gives them a competitive advantage overseas.

Exports have been rising - but not as strongly as policymakers initially expected - due to the slowdown in emerging economies, particularly China.

The BOJ hopes that overseas growth will accelerate and boost exports in time to make up for any slowdown in household spending after the expected sales tax hike next April.

Ishida said while inflation would accelerate as robust spending encouraged companies to raise prices, household incomes had to rise in tandem if the economy was to keep improving.

And it was a rise in regular pay, which makes up about three-quarters of nominal wages, rather than bonuses that would drive the increase in consumption, he said.

Summer bonuses rose this year but regular pay continued to fall as companies were reluctant to boost monthly salaries due to expectations that deflation won't be eradicated easily.

(Editing by John Mair and Richard Borsuk)

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