BOJ's Funo calls for structural reforms to boost Japan's weak inflation

By Leika Kihara

SAPPORO, Japan (Reuters) - Bank of Japan board member Yukitoshi Funo called for structural reforms to boost demand and productivity, in a tacit acknowledgement that massive monetary stimulus alone cannot accelerate inflation to the central bank's 2 percent target.

Funo reiterated the central bank's resolve to maintain its "powerful" monetary easing stance, as inflation remains distant from its goal despite signs of strength in the economy.

But the former Toyota Motor Corp executive said private-sector and government efforts to boost Japan's growth potential were also important to foster sustainable price rises.

Japan's rapidly ageing population means the demand outlook for goods and services will slacken, so companies must cut excess output capacity and put their human resources to better use, he said.

"Japan's economy still has room to raise productivity when seen from a global perspective," Funo said in a speech to business leaders in Sapporo, northern Japan, on Wednesday.

To ease the pain from such streamlining efforts, Japan needs a growth strategy to promote innovation and create new business opportunities, he said.

For instance, the government can help companies develop attractive new goods and services, and bring them to consumers beyond the reach of these businesses, he added.

Japan must also take steps to promote job mobility, while companies should cut excess services or overlapping operations to cope with labour shortages, he said.

"Now is a good chance to proceed with structural reforms and growth strategies, because monetary conditions are very loose and the job market is tight," Funo said. "Japan should not miss this opportunity."

Japan's economy expanded at an annualised 1.0 percent in the first three months of this year, posting a fifth straight quarter of growth on firm exports and a pick-up in consumption.

Household spending hit its highest for two years in June as job availability reached a 43-year peak. But core consumer prices rose just 0.4 percent in June from a year earlier, well below the BOJ's target, underscoring the challenge policymakers face in vanquishing deflation.

Funo said a strong economy and a tightening job market will likely gradually push up wages and inflation. But he said there was a risk companies may remain reluctant to raise wages.

At last month's rate review, the BOJ left policy steady but once again delayed the timing for hitting its price goal.

Funo has voted with the majority of the board, including its decision last year to shift its policy focus to targeting interest rates from increasing the money supply.

(Editing by Chris Gallagher)