BOJ's Iwata says there's no need to raise rates now

By Leika Kihara

AOMORI, Japan (Reuters) - Bank of Japan Deputy Governor Kikuo Iwata on Thursday dismissed the need to raise interest rates any time soon, stressing that the economy still needs support from "powerful" monetary easing with inflation distant from the central bank's 2 percent target.

Japan's low inflation expectations mean its short-term real interest rate, which is calculated by subtracting inflation expectations from nominal interest rates, remains higher than that of the United States, Iwata said.

The BOJ must therefore maintain its massive stimulus programme, even if global long-term interest rates rise on expectations of stronger world economic growth and steady interest rate hikes by the U.S. Federal Reserve, he said.

"Japan is still distant from achieving the BOJ's inflation target and needs support from monetary easing," Iwata said in a speech to business leaders in Aomori, northern Japan.

"There is absolutely no need to raise interest rates and diminish the degree of monetary easing, which is not that big compared with that of the United States," he said.

Iwata also countered the view the BOJ should abandon its 2 percent inflation target, saying the goal was crucial in heightening inflation expectations and ensuring real interest rates remain low to fend off any adverse shocks to the economy.

"Many major economies, including Japan, set their inflation targets around 2 percent because of a commonly shared view that it's important to anchor inflation expectations at 2 percent and secure sufficient room to reduce real interest rates," he said.

After three years of heavy asset buying failed to drive up inflation, the BOJ revamped its policy focus last year to one capping long-term interest rates from that targeting the pace of money printing.

Core consumer prices rose just 0.3 percent in April from a year earlier, well below the BOJ's target, as companies remain wary of raising prices for fear of scaring away cost-sensitive households.

But growing signs of life in Japan's economy have presented the BOJ with a fresh communications challenge, pushing it to be clearer with markets on how it might dial back its stimulus - even though such action remains a long way off.

Japan's economy grew in the first quarter at its fastest pace in a year to mark the longest period of expansion in a decade, thanks to robust exports and a boost from private consumption.

Some analysts believe the BOJ could be forced to raise its yield target if pressure from rising global bond yields make it hard to cap Japanese long-term interest rates.

An architect of the BOJ's huge asset-buying programme, Iwata has been among those in the nine-member board who place more emphasis on the boost the bank's massive money printing could have on the economy and inflation expectations.

(Reporting by Leika Kihara; Editing by Chris Gallagher & Shri Navaratnam)