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Economy

Kuroda recommits to stimulus in long struggle with deflation

Breaking mindset on prices is no easy task, BOJ chief warns ahead of second term

Bank of Japan Gov. Haruhiko Kuroda at a news conference at the bank's headquarters in Tokyo on March 9. (Photo by Akira Kodaka)

TOKYO -- Bank of Japan Gov. Haruhiko Kuroda reaffirmed his commitment again Friday to the central bank's easy-money policy as he nears the end of his first term without achieving his goal of 2% inflation.

Kuroda gave a news conference after the BOJ policy board, at the last meeting of the current leadership, voted to maintain current stimulus policies. He has been asked by the government to serve a second five-year term, starting in April, with two new deputy governors.

"Dispelling the deflationary mindset is taking time, and this is why we have been unable to realize the 2% price stability target," Kuroda told reporters at the bank's headquarters in Tokyo.

Several factors hit Japan that stifled a rise in prices during Kuroda's first term, from plunges in crude oil prices to the hiking of the consumption tax rate to 8% in 2014. But he cited consumer sentiment as an even greater force. Seemingly endless deflation has kept consumers from even imagining higher prices, and that attitude is preventing prices from rising in reality, he believes.

Breaking such a mindset is taking longer than Kuroda expected, and the BOJ has decided to keep stimulus measures in place for the long haul. The central bank initially bolstered its Japanese government bond purchase program and took other quantitative easing steps. But facing speculation about the limitations of the bond-buying program, the bank introduced a policy overhaul with yield-curve control in September 2016. That was "an important change," Kuroda said Friday, while pledging to "persistently continue with easing."

The BOJ believes that, if it keeps the current extremely loose monetary policy in place, prices will eventually rise 2%. The gap between the Japanese economy's demand and its potential supply capabilities has improved, Kuroda pointed out, noting that businesses have started raising wages and prices more seriously. This will lead to a 2% inflation rate by around fiscal 2019, he predicted.

"We see no changes to the economy's strong fundamentals," he said.

Financial markets saw an exodus from risky assets in February, depressing stocks around the world. But the Japanese economy's foundation remains solid, Kuroda said, describing corporate earnings outlooks as "robust." Asked about the yen's possible rise in light of the U.S. administration's protectionist moves, the governor said he does not expect "protectionism to spread globally."

Looking ahead to his second term, Kuroda emphasized the central bank's commitment to its easy-money policy. "This is not the time to have any concrete debate on an exit," he said.

If there is speculation that the BOJ might be moving to normalize its policy, the yen might keep strengthening, squeezing profits at exporters. Earnings deterioration probably would discourage employers from raising wages, further stalling any inflation trend. "If the momentum [for inflation] is not maintained, we'll consider additional easing," Kuroda said.

Waseda University professor Masazumi Wakatabe is an outspoken proponent of aggressive monetary easing.

At the same time, however, the longer the BOJ keeps its loose policy, the more it is expected to pay attention to the policy's side effects, including a profit squeeze at financial institutions. While shooting down speculation about normalization, Kuroda suggested that tweaking its policy of guiding short-term interest rates to minus 0.1% and long rates around 0% might be an option separate from a debate on an exit. Lifting the nominal interest rate if the inflationary trend picks up "would be theoretically possible," he stated, leaving wiggle room for a policy adjustment.

Kuroda is to begin his second five-year term April 9, assuming the Diet approves his reappointment. To replace Deputy Governors Hiroshi Nakaso and Kikuo Iwata, the government has nominated Waseda University professor Masazumi Wakatabe and BOJ Executive Director Masayoshi Amamiya.

Wakatabe, an outspoken reflationist, told a parliamentary committee at his confirmation hearing that further easing was an option. But such a path is risky given the likely side effects. This means the Kuroda-led BOJ cannot afford to either scale down or expand its stimulus program -- and thus is entering its second five-year term with few options on the table.

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