TOKYO: Bank of Japan Governor Haruhiko Kuroda offered an upbeat view of the economy but sought to douse market talk the central bank may soon consider raising interest rates, vowing instead to keep policy loose to achieve the BOJ’s 2 per cent inflation goal.
Kuroda also said he did not see recent yen falls as a problem for Japan’s economy, saying that a weak currency helps accelerate inflation by boosting import costs and in so doing raise inflation expectations — a crucial element in the BOJ’s plan to beat economic stagnation.
“We are still distant from our 2 per cent inflation target.
It’s therefore appropriate to continue with powerful monetary easing,” Kuroda told a news conference on Tuesday.
“It’s absolutely not the case that Japanese government bond yields are allowed to rise in tandem with overseas long-term interest rates, or that [any such rise in Japanese yields] would prompt us to raise our yield targets.” Kuroda’s remarks came after the BOJ’s widely expected decision to keep unchanged its pledge to guide short-term rates at minus 0.1 per cent and the 10-year government bond yield around zero per cent.
Japanese long-term interest rates have risen in tandem with global bond yields on expectations of steady US interest rate hikes and the perceived inflation-stoking policies of incoming US President Donald Trump.
This has tested the BOJ’s resolve to cap the 10-year Japanese government bond (JGB) yield around its target. That in turn has led to some market expectations the BOJ may raise its target for the 10-year JGB yield, which briefly hit 0.1 per cent last week, as early as next year.
“Kuroda is not interested in raising the yield target and would not be bothered by further yen weakness,” said Hiroaki Muto, economist at Tokai Tokyo Research Centre.
“Kuroda says he is not targeting the yen, but in reality he is. He looked happy with recent market moves.” Kuroda said the BOJ did not have a rigid range in mind in guiding 10-year bond yields “around zero,” stressing that it won’t intervene just because yields exceed a certain level.
“It’s not as if 10-year JGB yields must be fixed rigidly at zero per cent,” he said.
Market expectations of additional monetary easing have receded after the BOJ revamped its policy framework in September to one better suited to a long-term battle against deflation.
With inflation stubbornly shunning the BOJ’s 2 per cent target, the bank is in no rush to raise its 10-year JGB yield target either, and sees any such move as a long-term option.
Still, the BOJ is more open to discussing the idea and may contemplate raising the target as early as next year if long-term rates reflect clear improvements in the economy and keep rising, sources have told Reuters.
Backing market expectations that the BOJ’s next move could be a hike — not a cut — in its yield targets, the bank upgraded its language to signal its confidence that the economy is headed for a steady recovery.
“Japan’s economy continues to recover moderately as a trend,” it said in a statement, offering a brighter view than last month when it warned of slow emerging market demand that weighed on exports and output.
Underscoring its optimism on the outlook, the BOJ even revised up its view on private consumption — considered a soft spot for the Japanese economy — to say it was holding firm.
But it maintained its sober view on inflation expectations to say they were on a weak footing, with consumer prices marking their eighth straight month of annual declines in October.
Some market players have speculated that further yen declines could prompt the BOJ to raise its yield targets in the hope of stemming excessive yen falls, which hurt consumption by pushing up imported fuel and food costs.
But Kuroda offered a sanguine view on recent currency moves, saying that they were more a case of a strengthening dollar than a weakening of the yen.
“It’s possible the divergence in monetary policy directions could affect currency moves. But for now, I don’t see current yen falls as excessive or posing any problem,” he said.
Growth in the world’s third-largest economy has been subdued but exports and factory output have recently shown signs of life on a pick-up in emerging Asian demand.
The BOJ may see plenty of reasons to sustain the weak-yen trend by keeping rates steady and allow future Federal Reserve rate hikes to push up the dollar, giving Japanese exports a further boost, said Yasunari Ueno, chief market economist at Mizuho Securities.
“Kuroda is probably thinking that interest rate differentials must be left wide open in order to weaken the yen.”
BOX: Key issues for Japan’s economy
GROWTH: Japan’s economy grew at a 1.3 percent annual pace in July-September, the third straight quarter of expansion but below most economists’ forecasts. Quarterly growth was 0.3 percent. By comparison, the US economy expanded at a 3.2 per cent annual rate in the last quarter.
TRADE: Japan’s exports fell 0.4 per cent from a year earlier in November. That was better than forecast and the smallest decline in over a year. Mostly it was due to a weakening in the Japanese yen, which has lost value as the US dollar surged after Donald Trump was elected president.
INFLATION: The BOJ said Japan’s consumer price index would likely remain at zero or slightly negative for now, well below a 2 per cent target set nearly four years ago. At the same time, surging costs for health care and fresh vegetables are causing consumers to hold back on spending.
UNEMPLOYMENT: Japan’s jobless rate is at 3.0 per cent, and many companies complain they cannot find enough workers.
INCOMES: Real incomes have been falling or flat, as employers resist raising wages out of fears they would be locked into higher labour costs in a downturn.
INVESTMENT: A weaker yen can boost earnings of Japanese companies that get a large share of their profits overseas. So far, however, strong profits have not resulted in a surge in corporate investment, which has been at best modest and often flat or slightly negative in the past year.
WILD CARDS: Apart from the slowdown in growth in key export markets like China, uncertainty over the outlook for global markets, the economy and trade once President-elect Trump takes office” Britain’s plans to leave the European Union and broader geopolitical crises are also potential risks, the BOJ said.
-AP
