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BOJ board member says Japan can weather tax hike, grow above potential rate

By Stanley White

WAKAYAMA, Japan (Reuters) - Japan's economy can continue to exceed its potential growth rate after a planned sales tax hike in April, Bank of Japan board member Yoshihisa Morimoto said on Thursday, in a sign of confidence the tax hit to consumption will not derail the economy.

Morimoto also said he expects exports to grow gradually as a recovery in advanced countries spreads to Asia, but some economists are starting to worry about external demand after Japan posted a record trade deficit in January.

Morimoto's comments were in line with the BOJ's official stance that the economy does not need additional monetary easing. But there are lingering doubts about the central bank's willingness to stand aside if risks to the outlook continue to grow.

"We expect demand to rise before the tax hike and then fall afterwards," Morimoto said in a speech to business leaders in Wakayama, western Japan.

"It is important to average out these swings when deciding monetary policy and whether we are progressing toward our inflation target."

Morimoto, a former utility executive, stuck to the BOJ's assessment that Japan's economy was headed for a moderate recovery and making steady progress toward achieving the central bank's 2 percent inflation target.

There is a high chance that consumer prices will reach 2 percent from the second half of fiscal 2014 to fiscal 2015, Morimoto said.

As widely expected, the BOJ on Tuesday maintained its pledge of increasing base money, its key monetary policy gauge, at an annual pace of 60-70 trillion yen ($589-$687 billion).

The BOJ has stood pat on policy since launching an intense burst of stimulus last April, when it pledged to accelerate inflation to 2 percent in roughly two years via aggressive asset purchases in a country mired in deflation for 15 years.

Morimoto reiterated the central bank's view that exports will start to pick up as growth in the United States and Europe stimulates activity in China and other Asian countries.

However, the data show there are reasons to be worried.

Japan suffered a record trade deficit in January, the finance ministry said earlier on Thursday, as a weak yen pushed up the cost of imports and failed to substantially raise exports.

The data followed on the heels of a survey showing manufacturers' sentiment worsened in January, underscoring the stiff challenges for Prime Minister Shinzo Abe's strategy to spark sustainable growth over the long run.

The government will increase the sales tax in April to 8 percent from 5 percent, and consumers have been buying cars, homes and durable goods before increase.

On Monday, weaker-than-expected fourth-quarter GDP dashed hopes that a rush in household spending ahead of the tax hike will be strong enough to cushion the pain from sluggish export growth.

(Editing by Shri Navaratnam)

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