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Economy

Kuroda shuts door on exit strategy next fiscal year

2% inflation target remains BOJ's top priority

BOJ Gov. Haruhiko Kuroda speaking during his confirmation hearing March 2.

TOKYO -- Appearing at the lower house Friday, Bank of Japan Gov. Haruhiko Kuroda repeatedly shot down rumors that the central bank is gearing up to start rolling back its superloose monetary policy.

"I have no intention to explore any concrete debate on an exit" during the fiscal year ending March 2019, Kuroda said during the confirmation hearing on his reappointment to a second five-year term.

He began the first term in 2013, touting a goal of achieving a 2% inflation rate in two years. While his monetary easing program of an unprecedented scale has played a hand in improving certain areas of the economy, such as unemployment, the inflation rate remains stubbornly distant from the 2% target today.

"A turnaround from a deflationary mindset will take time," said Kuroda. That the inflation goal has yet to be achieved "is regrettable," he added.

While fielding questions from lawmakers, Kuroda constantly brushed off speculation that the BOJ will move to normalize its policy.

"The moderate rise of prices, alongside upturns in employment and wages, will contribute to the development of the national economy," he said. To achieve the 2% inflation goal, wages would have to be rising by at least 3% a year, he added.

"It would be inappropriate to immediately discuss an exit," Kuroda concluded.

In the latter half of 2017, some within the BOJ began exploring the idea of calibrating guidance levels for long-term interest rates upward. But that opportunity has faded with the appreciating yen and volatile stock prices.

It appears that Kuroda wants to end the speculation of a possible policy normalization in near term as he begins his second term to ensure a smooth start for a new BOJ leadership team.

Even when discussing the purported side effects of the massive easing policy, Kuroda managed to maintain a positive spin. Smaller regional financial institutions are currently reaping high earnings due in part to increased lending, he pointed out.

Kuroda did note that regional lenders need to improve their operational strategies. "Amid declining regional populations, the number of branches and employees have come to be disjointed from the shrinking trends in business," he said.

In any case, the BOJ governor expressed a firm commitment to maintaining the current easing program, including the negative rate policy, until the 2% inflation target is attained.

But that may change around fiscal 2019, when the BOJ predicts it will reach the price stability goal. Kuroda stated that while the bank will discuss an exit strategy then, such talk is off the table until consumer prices climb.

It seems Kuroda sees the next two years through fiscal 2019 as a critical period for achieving the inflation target. Looming on the horizon is the increase of the national sales tax to 10%, scheduled for October 2019. That event risks softening investment and consumption, which could be a drag on inflation.

But despite Kuroda's attempts to quiet speculation that the BOJ is moving in a hawkish direction, the market still reacted to the fact that the central bank chief mentioned the terms "exit strategy" and "debate." Long-term interest rates rose while the yen advanced midway into the 105-per-dollar region, strengthening by more than 1 yen since Thursday evening.

There has been a clear gap in expectations between Kuroda and market players in terms of what the central bank would do next. Even an insider such as Takahide Kiuchi, who served as a BOJ board member until last summer, predicted that the bank will start laying the groundwork for normalization in a recent report released under his new role as a private-sector economist.

Perhaps realizing this expectation gap, Kuroda, who has been criticized for surprise moves in the past, indicated his intention to focus more on dialogue with market players.

"Appropriately communicating information to internal and external financial markets is also a crucial role for a central bank governor," Kuroda said during the Friday hearing in the lower house.

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