By Leika Kihara
NAGASAKI, Japan (Reuters) - A sales tax hike scheduled for October could derail Japan's economic recovery, a central bank board member said on Wednesday, noting more monetary stimulus would be needed if a slowdown hampered the bank's efforts to boost prices.
Yutaka Harada, a pro-stimulus member of the Bank of Japan's board, warned the country's economy was already hurt by sluggish exports and output, and that the tax increase would compound the slowdown.
"By raising the sales tax when the economy is at such a critical juncture, Japan risks sliding into recession," Harada told a news conference after meeting with business leaders in Nagasaki, southern Japan.
While capital expenditure and private consumption have so far withstood the impact from falling exports and output, risks to the economy were heightening, said Harada, a vocal advocate of aggressive monetary easing.
"If the economy deteriorates to the extent that achieving our price target in the long-term becomes difficult, it's necessary to strengthen monetary easing without delay," Harada said in a speech to the Nagasaki business leaders.
Reflationist-minded BOJ board members like Harada had argued in the past that the central bank must do more to quicken achievement of its price target.
However, his comment that the BOJ must act if the price target becomes hard to hit "in the long term" underscores a growing sense within the central bank that it is running out of effective tools to prop up inflation.
Harada said the BOJ can look through factors that curb inflation in the short-term, such as expected cuts in cellphone charges, and focus instead on economic developments that affect prices in the long run.
If the BOJ were to ease further, it could cut interest rates, accelerate the pace of money printing or commit to maintaining ultra-loose policy for a longer period of time, he said.
But Harada dismissed the idea of propping up the economy via unlimited money-printing to finance government spending - a concept dubbed "Modern Monetary Theory" (MMT) that is being floated by some U.S. academics.
"If the government issues debt denominated by its own currency, it might not default. But doing so will cause runaway inflation, so the idea won't work," Harada said.
"The government could raise taxes or cut spending to control inflation. In reality, however, this will be very hard to do."
The BOJ's nine-member board is divided between those like Harada who see room to ramp up stimulus, and those who are more worried about the rising cost of prolonged easing.
Years of heavy money printing by the BOJ have failed to fire up inflation and crushed long-term interest rates near zero, drawing criticism from financial institutions for narrowing their margins and hurting their profits.
Harada said those who argue that the BOJ's ultra-loose policy was hurting financial institutions ignore the benefits years of monetary easing have brought to the economy.
"The deterioration of banks' profitability is actually caused by a structural problem, which is that they are accumulating deposits despite a lack of borrowers," he said.
Japan's core consumer prices rose 0.8% in March from a year earlier, remaining distant from the BOJ's 2% target.