Exclusive interview: BOJ boss on inflation, future risks and more
TOKYO -- Bank of Japan Gov. Haruhiko Kuroda sees a need for economic reform in Asia, including Japan. In an exclusive interview with The Nikkei, the man who uncorked a "new paradigm" in monetary easing discussed growth prospects at home and across the region.
Kuroda has been at the BOJ's helm for more than a year, working to free Japan from the deflation trap. The central bank is shooting for 2% inflation by the end of next year or later, and indeed, the chains on prices have loosened considerably. But the governor acknowledges that if and when the bank hits that target, the economy will not necessarily flourish. Labor and supply shortages could still spell trouble.
As for Asia as a whole, Kuroda believes the region will continue on its growth trajectory. But having served as president of the Asian Development Bank before taking his current post, he is well aware of the challenges and risks some countries face. He warns that many nations need to restructure their economies -- and keep their deficits in check.
Q: These are tense times in Asia. What is your assessment of the region's economic outlook?
A: The Asian economy will continue to grow, but the countries and industries leading the region's growth will gradually change. Japan played that leadership role after the end of World War II. The four tigers (Hong Kong, South Korea, Singapore and Taiwan), the Association of Southeast Asian Nations and China took over in stages. India and Indonesia, in particular, are expected to be next.
There is a good chance Asia will account for more than half of global gross domestic product in the future. But that will not necessarily happen automatically. Many Asian nations have grown through excessive reliance on exports and investment. Their growth will become unsustainable, unless they reorient their economic and industrial structures toward the direct enhancement of citizens' living conditions -- toward things like consumption and housing investment.
I want to avoid sweeping generalizations, since countries are at different stages of development and have their own unique economic and social conditions. But on the whole, reforms are needed in Asia.
A situation like the Asian currency crisis of 1997 could occur if the region loses its macroeconomic balance. Structural reforms are needed to withstand industrial changes and shifts in demand, while preventing fiscal and current-account deficits from swelling too large. Asian nations are capable of this.
Q: It has been more than a year since the BOJ introduced its new easing program. Has it worked as you expected?
A: Monetary policy has evidently produced the intended results.
When we decided to adopt quantitative and qualitative easing on April 4 of last year, we had in mind at least three ways in which monetary easing would affect the real economy. One was lowering yield curves as a whole, including long-term interest rates. The second was the so-called portfolio rebalancing effect (whereby BOJ purchases of certain assets nudge private investors toward other assets). The third effect we envisioned was a turnaround from deflationary expectations. The policy has proved effective on each of these fronts.
Massive purchases of government bonds have achieved low and stable long-term interest rates. At the same time, expectations of inflation are increasing. It seems real interest rates, or nominal interest rates minus the effects of price rises, have dropped and are now in negative territory. These developments have probably had favorable effects on investment and consumption.
Recently, the consumer price index has been rising faster year on year. The index, excluding fresh food, has been climbing at a pace of 1.3% over the past four months. This is the first continuous price rise at such a clip since 1993 -- barring 1997, when Japan's consumption tax was raised, and 2008, when prices of primary commodities such as oil and food ascended worldwide.
We have reached this point smoothly. But we are still only halfway to our inflation target of 2%. Economic and financial conditions could change in Japan and overseas. We will examine risks and make necessary adjustments without hesitation. That is our stance now, and it will continue to be.
Q: What was the impact of Japan's sales tax hike, from 5% to 8%, in April?
A: My impression is that demand before the tax increase was within expectations, as are the effects of the hike. Last-minute demand was considerable in March and possibly helped raise the economic growth rate for the January-March period. Hearings we conducted in April and so far in May suggest post-hike declines in demand have not been steeper than anticipated. While sales of cars and durable goods have apparently decreased, I hear the declines are gradually narrowing at retailers.
Although (the domestic economy) will contract in the April-June period, due largely to a drop in consumer spending, the adverse effects on demand will start tapering off this summer. Expansion should resume from the July-September quarter, and the rate of growth is likely to gain speed in stages. But as only a small number of economic indexes have been released since the sales tax hike, I think we need to analyze the situation more closely.
Q: There is a wide gap between the BOJ's outlook for the economy and prices and the expectations of the market. Could you explain this?
A: The BOJ expects the rate of increase in the CPI (excluding fresh food), not accounting for the direct effects of the sales tax hike, to be around one and a quarter percent for some time. This is because of an offsetting effect -- price increases resulting from the yen's depreciation will gradually subside, while growth led by domestic demand will narrow the supply-demand gap and push up wages and prices.
We maintain that prices will resume an upward trend, starting in the second half of the current fiscal year, and are highly likely to reach an inflation rate of 2% in or around fiscal 2015. Our GDP projection is little different from private-sector forecasts, but there is a considerable gap in the outlook for prices.
The current economic recovery is led by nonmanufacturers and has strong job-creation effects. The BOJ takes the tight labor market into account to a greater extent than private-sector economists. This is probably one reason for the difference. Prices are being pushed up because wages are tending to rise.
The BOJ and private economists differ in how they view the expected rate of inflation. While the outlook for price rises among households and businesses has come closer to that of the BOJ, private-sector economists expect prices to increase much more slowly than the BOJ forecasts. The BOJ is paying attention to how the expected rate of inflation is starting to be reflected in wages and prices set by businesses.
Q: Speculation about additional monetary easing continues to swirl among market players.
A: Prices are smoothly moving toward our 2% stability target, in line with our scenario of achieving the target as early as possible but within a period of around two years. Still, as I have repeatedly said, we are ready to make adjustments -- whether it is an additional easing or some other measure -- without hesitation if changing conditions cause prices to deviate from our scenario.
Q: Do you feel the pressure for additional easing is waning?
A: Uncertainties about inflation rates, for this fiscal year and the next, are decreasing compared with a year ago, when we adopted quantitative and qualitative monetary easing. This reflects narrowing gaps between price outlooks among the members of the BOJ policy board. But risks remain, both upside and downside.
Q: If further easing were to prove necessary, what could the BOJ actually do?
A: The means would depend on the kinds of risks that arise. We would take the most effective and efficient measures according to the prevailing economic and financial conditions. Right now, I cannot say specifically what we would do. But I can say we would have various possibilities.
Q: You have said the BOJ will not take a "sequential" approach to implementing policies. But additional easing would amount to sequential fine-tuning, wouldn't it?
A: We have drawn a clear scenario for attaining the price stability target of 2% as early as possible, within a period of about two years. If price movements deviate from this path, we will not hesitate to make adjustments. But we have no thoughts of making sequential adjustments simply because certain economic indexes move up or down.
Q: Is there anything the BOJ can do to raise Japan's growth ceiling? What do you expect from the government?
A: The supply-demand gap is rapidly narrowing, especially in the labor market. I'm not saying there is a hard ceiling, but effects on the entire economy must be considered fully. We don't think we can forget about everything else if we achieve the 2% price stability target.
Prices should rise through improvements in wages and employment, against a backdrop of balanced overall economic growth. It is becoming more important to raise the potential growth rate and supply capacity.
The problems of labor shortages and supply bottlenecks did not rear up during deflation, since demand was scarce. But as demand has increased over the past year thanks to monetary policy, fiscal spending and efforts in the private sector, these issues are becoming noticeable. Not only the government but also the BOJ and private sector need to earnestly consider how to strengthen the supply capacity.
Amid deflation, it was extremely difficult to carry out structural reforms. Now, the Japanese economy has come to a point where various structural reforms can be implemented.
To enhance the nation's medium- to long-term growth potential, three things are important. First, the private sector should further increase forward-looking capital investment. The BOJ has been working to steer real interest rates lower through its easing. We have also created facilities to support businesses by encouraging financial institutions to lend more.
Second, it is important for companies to expand the labor pool by, for example, hiring more women and seniors and accepting highly capable foreign workers.
Third, productivity should be improved through deregulation and regulatory reform. The BOJ has no intention of asking the government and private sector to pursue such steps without doing its part. We will continue to support actions toward increasing supply capacity.
Q: What will it take for the government's growth strategy to succeed?
A: A certain amount of time is needed before structural reform improves productivity and affects the real economy. The government's top priority should be to show an overall reform blueprint and implement policies with a sense of urgency.
There have been numerous proposals. I expect new plans for progress to be presented when the growth strategy is revised, in June at the earliest. Policies to encourage forward-looking investment in the private sector, increase the employment of women and seniors and, through deregulation, create a business-friendly environment are important. The tax system, including corporate taxes, is up to the government and parliament to decide, but it is an important topic for debate.
Q: If the government and private sector are slow to make progress, will it be difficult to reach the 2% price target?
A: Not necessarily. We, as the central bank, are committed to the 2% price stability target and have been striving to clear it. There has been no change, whatsoever, in our effort to live up to that commitment.
Regardless of the potential growth rate, it is the central bank's mission to attain the inflation target of 2% under given economic conditions -- and to maintain it in a stable manner.
Q: The government plans to raise the consumption tax again in October 2015, to 10%. If economic conditions make that hard to do, would the BOJ consider helping out with monetary policy?
A: The BOJ has implemented its quantitative and qualitative easing policy, and formulated its economic outlook, on the assumption that the consumption tax will be raised to 10% in fall 2015. As the taxation system is a matter for the parliament and government to discuss, the central bank should not comment on it. But it is important to establish a sustainable fiscal structure.
Japan's medium-term fiscal plan calls for halving the primary balance deficit by fiscal 2015 and eliminating it by fiscal 2020. It is important to push forward on this steadily.