Italy, Japan central bankers see risks to inflation outlook

TOKYO: Italian and Japanese central bankers warned on Monday of the damage that weak inflation expectations could inflict on their economies, as the euro-zone and Japan suffer from anaemic prices despite years of aggressive monetary easing.

Bank of Italy Director General Salvatore Rossi said central banks should never let inflation remain low as that could affect people´s psychology and hurt inflation expectations.

"In Europe, we see risks of a de-anchoring of inflation expectations.

That´s why (European Central Bank President Mario) Draghi said many times that the stance of euro-area monetary policy is so accomodative and every tool is brought on the table," Rossi told a seminar hosted by Japan´s Keio University.

Bank of Japan Deputy Governor Hiroshi Nakaso told the same seminar that Japan´s two-decades experience of deflation showed it was very important to "act quickly" against subdued price growth as once entrenched, it would hurt inflation expectations.

"Our experience probably tells you that if actual inflation stays low for too long, it affects inflation expectations.

"Japan´s central bank is three years into a massive asset purchase programme but inflation has ground to a halt.

Nakaso declined to comment on how a strong yen could affect the BOJ´s policy decisions.

But he stressed that it was important to look not just at first-round effects of yen rises but the full pass-through effect on the economy and prices.

"The first-round effect is the direct impact on consumer price index, while the full pass-through effect includes indirect channels such as improvements in the output gap and inflation expectations.

"He also reiterated that it was desirable for currency rates to move stably, reflecting economic fundamentals.

"The desirability of exchange-rate stability is widely shared by the Japanese industry," he said.

On the impact of a British referendum on whether to stay in the European Union, Rossi said it was not all negative.

"If Britain votes to stay, there could be some upside because confidence would improve," Rossi said.  "The resilience of the euro-area economies and financial markets to such exogenous shocks have increased substantially," he added.

Britain´s momentous referendum on whether to stay in the EU has been a prime issue for global markets and policymakers, who can largely only wait and see what Britons will say at the polls on June 23. The ups and downs of polling data have swayed financial markets for months.