Japan's chief cabinet secretary calls for broad-based wage hikes

By Yukiko Toyoda and Kentaro Sugiyama

TOKYO (Reuters) - Broadening pay hikes among smaller firms is crucial, said Japan's top government spokesperson, Yoshimasa Hayashi, underscoring the administration's drive to achieve sustained wage gains.

Such gains have been a policy priority for Prime Minister Fumio Kishida's government, in its effort to prevent rising living costs from hurting consumption and derailing a fragile economic recovery.

Hayashi's remark came in a Reuters NEXT Newsmaker interview ahead of the Bank of Japan's policy meeting on July 30 and 31, when the board is likely to discuss whether conditions allow it to lift interest rates from current levels near zero.

It was crucial for Japan to achieve a "positive" cycle in which firms can pass on higher costs through price hikes, so that they can earn enough to keep raising pay, Hayashi added.

"We expect the Bank of Japan to decide specific monetary policy with an eye on what's happening in the economy, and through close dialogue with markets," Hayashi, who is the chief cabinet secretary, said on Friday.

"What's important is for a positive cycle to spread a bit more among smaller firms," he said, when asked about the expectations of some market players that the central bank could raise interest rates this month.

The government may compile a fresh fiscal stimulus package later this year to cushion the blow to households if inflation rises further, Hayashi added, with the size of spending to hinge on economic conditions in coming months.

In a shift away from a decade-long programme of radical stimulus, the Bank of Japan (BOJ) exited negative interest rates and bond yield control in March. Markets are warming to the idea of a rate hike at this month's policy meeting.

BOJ Governor Kazuo Ueda has signalled the bank's readiness to hike rates if there is sufficient evidence that wage hikes will broaden, and keep inflation durably around its 2% target.

While big firms have offered bumper pay hikes in annual wage negotiations this year, it is unclear whether their smaller counterparts can keep up.

Asked about recent yen declines and their impact on the economy, Hayashi said it was desirable for currency rates to move in a way that reflected fundamentals, but declined to comment on whether recent levels were out of line with them.

The yen has fallen more than 10% against the dollar this year to languish around 38-year lows, weighed down by the wide difference in interest rates between the U.S. and Japan.

Tokyo is suspected to have stepped into the market this month to prop up the yen, which has hovered around 157.50 to the dollar, after touching a six-week high of 155.375 last week in the wake of suspected intervention.

Hayashi said he saw no immediate need to revise a joint statement between the government and the BOJ in 2013 that commits the central bank to meeting its inflation target of 2% "at the earliest date possible".

The joint statement served as the backbone of former BOJ governor Haruhiko Kuroda's radical monetary stimulus and justification for keeping Japan's interest rates ultra-low.

Critics have said its focus on the need to beat deflation has become outdated at a time when Japan has faced inflation exceeding the BOJ's 2% price target for more than two years.

(Reporting by Yukiko Toyoda and Kentaro Sugiyama; Writing by Leika Kihara; Editing by Clarence Fernandez)