January 5, 2017 3:00 pm JST
BOJ Watch

BOJ Gov. Kuroda has promising '1st dream' of new year

Central bank confident it will make progress against deflation

MASAYUKI YUDA, Nikkei staff writer

BOJ Gov. Haruhiko Kuroda speaks during an interview with The Nikkei in Tokyo on Dec. 27, 2016.

TOKYO -- Bank of Japan Gov. Haruhiko Kuroda must have been encouraged by his "first dream" of this year.

In an address to the Japanese Bankers Association's new year gathering on Wednesday, Kuroda stressed that the central bank will move forward in 2017 with greater confidence toward ending the country's lingering deflation.

In Japan, traditionally, one's first dream of the year foretells the luck for the ensuing year. It may be fair to speculate that the upbeat declaration was prompted by Kuroda's bullish first dream of the year. During an interview with The Nikkei in late December, he said, "We are still not in a condition where we can say we have escaped deflation or that we can achieve the 2% price stability target."

As the year started amid the yen's steep depreciation and sharp rises in stock prices, Kuroda appeared relaxed and confident at the gathering. Noting that participants' facial expressions are a key index to reflect economic activity, Kuroda joked that they looked "softer and brighter" than a year earlier, sparking laughter from the audience.

Solid markets

Market developments at the start of this year offer a clue as to the first dream, which had made Kuroda relaxed and confident.

The so-called Trump rally, which boosted markets at the end of last year, is starting to return to life. The Tokyo stock market kicked off the new year on Wednesday with the Nikkei Stock Average finishing at a 2016-2017 high and logging a gain in the year's first trading session for the first time in four years. In addition, the yen hit the middle of the 118 level, the weakest in about three weeks, during intraday trading.

The solid U.S. economy is behind the market developments. Kuroda said the world economy, led by the U.S., is entering a "new phase" following the post-financial crisis period of stagnation, adding that the Japanese economy is enjoying a continuing "forward-looking momentum."

The BOJ's policy is to keep overall interest rates low under yield curve control. If the world economy begins to pick up and interest rates rise, wider differences in rates between Japan and other countries will help the yen weaken further.

A weaker yen raises import prices. It also contributes to wage hikes, and sparks consumption through improvements in corporate earnings. If it leads to stock price rises, an increase in consumer spending due to wealth effects can be expected.

In such a case, attaining the bank's 2% inflation target during Kuroda's term will come into sight again, though the BOJ has almost abandoned it.

Kuroda's first dream of the new year may have been the revival of the path toward price rises, envisioned in the initial stage of Abenomics.

Nevertheless, Kuroda showed he is well aware the world economy is not rock-solid, citing the presence of worrisome factors such as policy management by the incoming U.S. administration of Donald Trump and the outcome of Britain's withdrawal from the European Union.

Key events that will greatly affect the world economy, including Trump's inaugural address on Jan. 20, are likely to make themselves felt earlier than expected, raising the question of how long Kuroda can fulfill his rosy "first dream" of the year.

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