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Economy

BOJ doesn't need to set deadline for price stability target

TOKYO -- Despite plans to draw up a fiscal reconstruction plan by summer, the Japanese government still faces a decline in tax revenues as a result of delaying raising the sales tax to 10% till April 2017. Meanwhile, the Bank of Japan is still no closer to achieving its 2% price stability target after implementing its quantitative and qualitative monetary easing program in April 2013.

Toshiro Muto

     Toshiro Muto, a former Bank of Japan deputy governor and now chairman of the Daiwa Institute of Research, said making the fiscal plan "will be very difficult without bold reductions in expenditures.'' He also stressed that the BOJ doesn't need to state the exact deadline for achieving its price stability target.

     Muto spoke about fiscal management and monetary policy with Nikkei Quick News. Excerpts of the interview follow.

Q. What is the outlook for Japan's economy in 2015?

A. The economy will achieve positive growth of mid-1% or higher. Economic growth of about 1% could still have been achieved if the sales tax had been raised to 10%, but now it will exceed projections because of the delay in the tax hike. 

Q. What are the risks facing the Japanese economy?

A. First of all, the weakening yen poses a risk. It's okay as long as the yen hovers at about 115-120 against the dollar. However, if the yen weakens further, it will become very difficult for smaller companies relying on domestic demand for business to pass higher import costs onto consumers. I expect a weak yen to continue in the long term. 

Q. The government plans to draw up a fiscal reconstruction plan by summer. Do you think the government can achieve a primary balance surplus by fiscal 2020?

A. The government can achieve its target of cutting a primary balance deficit in half in fiscal 2015 compared with fiscal 2010, but it will be quite difficult to balance payments in fiscal 2020. Given raising the consumption tax rate to 10% has been delayed until April 2017, it will be difficult to raise it further by fiscal 2020.

     Without a sales tax increase, expenditures must be cut dramatically to achieve a primary balance surplus by fiscal 2020 by economic growth alone. It's possible to formulate a plan, but it's difficult to actually cut expenditures. 

Q. You have argued that the government should raise the consumption tax rate to about 16% and curb social security costs to achieve a primary balance surplus by fiscal 2020.

A. According to estimates by the Cabinet Office, even if the consumption tax rate was increased to 10% in October 2015 and the country grew at a faster pace, there would still be more than 10 trillion yen ($83.8 billion) in deficits in fiscal 2020. It was thought that if the sales tax was raised to 10% in 2015, there would be enough time to discuss raising the sales tax further within the next five years. However, as the consumption tax hike was delayed until April 2017 discussions have become even more complicated.

Q. It seems difficult for the BOJ to achieve its self-imposed deadline for reaching 2% inflation in two years. What is your take on that?

A. The problem is that the BOJ has set a two-year deadline for achieving its price stability target. Their original intention was to stir market expectations by showing a determined attitude. However, there are no other central banks that set such a certain deadline for achieving price stability targets. They don't set solid deadlines not because they aren't confident, but because they place importance on credibility.

     Crude oil prices have plunged unexpectedly and the rate of increase in the core consumer price index, excluding fresh food, has narrowed even without the effects of the decline in oil prices. It is becoming increasingly difficult to explain [the BOJ's] stance on monetary policy. 

Q. What do you make of the BOJ's monetary policy and its effect so far?

A. The BOJ's monetary policy has achieved a certain result. Since the rate of increase in core CPI has narrowed, it may look like the country is going back to deflation. However, as long as domestic prices, not import prices, rise and remain in the positive territory constantly, I would say the monetary policy has helped Japan to slowly escape deflation to a certain degree.

     A weaker yen has helped rise exports and corporate earnings, boosting expectations for wage increases. The total employee income is also increasing, though mainly through bonuses. The economy is improving on the whole, due in part to the wealth effect from higher stock prices.

     The mechanism for robust domestic demand recovery has yet to be established. If wages increase a little more, it will help pick up consumer spending. The government is actively urging employers to increase wages through three-way talks between the government, businesses and workers, but it is not that easy for small and midsize companies to raise wages. Wages will remain a big issue. 

Q. Do you think the BOJ has been communicating well with the market?

A. Former U.S. Federal Reserve Chairman Alan Greenspan used to say that no surprise is the best monetary policy. The BOJ's quantitative and qualitative monetary easing program, which it implemented in April 2013, has been successful. The bank surprised the market with an additional monetary stimulus last October, sending stock prices up and the yen down. However, surprises could create a sense of distrust and make it impossible to communicate with the market.

     It is very difficult to communicate with the market right now. Discussions over inflation, excluding the effects of the sales tax hike and falling oil prices, may make sense to market experts, but not to ordinary people. The BOJ's survey also shows that many people are finding it difficult to make ends meet as their wages remain unchanged but prices increase. The BOJ needs to explain its intention carefully and the effect of its monetary policy. 

Q. What do you think of the "exit strategy" toward the normalization of monetary policy?

A. It will be an exit from unprecedented, large-scale, bond-buying monetary easing. I'm concerned that the BOJ has not been able to set a course toward an exit. The Fed's exit strategy has worked well so far, as efforts from the era of former Fed Chairman Ben Bernanke have borne fruit. 

Q. Do you think there are any moderate, flexible exit strategies that would not shock the market?

A. The BOJ is trying to spread the effects of its quantitative and qualitative monetary easing, and I think it's the right decision not to make its exit strategy public.

     It is still years away before the BOJ discusses its exit strategy actively. It may be difficult for the bank to reverse its monetary policy before the consumption tax hike in April 2017. Once the timing of the exit comes, it is important the BOJ convinces people it will implement the strategy slowly and to actually take time doing it. It depends on circumstances whether the BOJ is allowed to take time. Prices could begin to rise unexpectedly. A rapid monetary policy tightening could lead to a sharp rise in long-term interest rates.

 

Interviewed by NQN staff writers Hiroo Kawata and Aya Kikuchi 

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