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By Takaya Yamaguchi
TOKYO (Reuters) - Japan's government will highlight the need to work closely with the central bank and guide policy "flexibly" in the wake of soft consumption and uncertainty over the inflation outlook, a draft of its annual economic blueprint seen by Reuters showed.
"Monetary policy has entered a new stage," which required the government and the Bank of Japan to "continue working closely and guide policy flexibly in accordance to economic and price developments," according to the draft.
By keeping inflation stably around the BOJ's 2% target, policymakers will seek to create an environment where wages rise faster than inflation on a sustained basis, the draft said.
The government draft will be presented to ruling party lawmakers for deliberations, before being finalised at a Cabinet meeting on June 21.
In the draft, the government said consumption "lacked momentum" with the outlook on prices unclear due in part to the effect of recent yen declines.
It also flagged lingering overseas risks such as the fallout from monetary tightening by central banks across the globe, and worries about soft Chinese growth.
Japan is facing a "critical moment" in shifting away from a deflation-prone economy that prioritised cost cuts, towards one where higher productivity allows more companies to keep hiking prices and wages, the draft said.
The government will submit legislation to next year's parliament to facilitate smoother pass-through of costs in industries like construction, transportation and agriculture, the draft said.
A weak yen and subsequent rise in households' living costs have hurt Prime Minister Fumio Kishida's approval ratings, prodding the administration to highlight its efforts to generate higher wage growth.
The BOJ, for its part, ended eight years of negative interest rates in March, and has signalled that it would hike rates further if it becomes more convinced that inflation will durably hit 2%.
(Reporting by Takaya Yamaguchi, Writing by Leika Kihara; Editing by Shri Navaratnam)
