Bank of Japan's QE skeptic says appropriate inflation lower than 2 percent

By Leika Kihara MAEBASHI, Japan (Reuters) - The Bank of Japan should give itself more time to achieve its ambitious price target, board member Takahide Kiuchi said, warning that an appropriate level of inflation for Japan is currently lower than the bank's 2 percent target. The remarks by Kiuchi, who has long been skeptical of the central bank's radical stimulus program, contrast with Governor Haruhiko Kuroda's conviction that Japan is on course to meet the inflation target during the year beginning in April. Kiuchi repeated his calls for watering down the two-year timeframe for meeting the inflation target, warning that Japan will see prices rise only gradually given the economy's low growth potential. "Inflation may reach 2 percent at some point in the future if, as hoped for, structural reforms progress and boost Japan's growth potential," the former market economist told business leaders in Maebashi, a city north of Tokyo, on Thursday. "But it's important to guide policy based on the understanding that an appropriate level of inflation for Japan now is lower (than 2 percent)," he said. The core consumer price index - which excludes volatile food but includes oil costs - rose just 0.2 percent in the year to January, slowing from 0.5 percent in December. WARY OF QE COSTS In deploying its radical stimulus in April 2013, the BOJ pledged to accelerate inflation to 2 percent in roughly two years through aggressive asset purchases. It eased policy again in October last year, but inflation has grounded to a halt on slumping oil prices and weak household spending. The nine-member board has been divided since then. Kuroda and his two deputies are adamant that the price target can be hit in the next fiscal year, while other members are skeptical about setting a deadline for the goal. Worried about the drawbacks of the BOJ's huge asset purchases, Kiuchi is among the four dissenting board members when the bank eased in October. "If the BOJ strengthens monetary easing excessively to push up prices in a short period of time to a level beyond what is justified by the economy's growth potential, this could destabilize economic activity and prices," Kiuchi said. He said the positive effect of stimulus has diminished with interest rates stuck around zero, and the BOJ's massive purchases have dried up liquidity in the bond market and may destabilize price moves in the future. As quantitative easing had succeeded in boosting demand and lifting the economy out of the doldrums, the BOJ should focus on minimizing the cost of its aggressive asset buying, he said. Kiuchi repeated his view that the BOJ should revert back to a conventional monetary policy targeting interest rates, from the current stance of targeting base money, in the long run. (Editing by Chris Gallagher and Simon Cameron-Moore)