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Positive demand trends keep Kuroda bullish on economy

Bank of Japan Gov. Haruhiko Kuroda

TOKYO -- Bank of Japan Gov. Haruhiko Kuroda remained optimistic about Japan's economy and inflation prospects at a post-policy-meeting news conference Thursday, pointing to significant improvement in consumer spending and exports.

Solid demand

Real gross domestic product shrank for a second straight quarter in the July-September period, contracting an annualized 0.8%, government data released Monday showed. Kuroda argued that this is in line with the central bank's assessment of a gradual recovery.

     The governor called declining inventory investment the main reason for the GDP drop. With inventory adjustment progressing and final demand strong, the situation "looks very different from the April-June period," when GDP also shrank, he said. He noted that consumer spending has been resilient and exports have been recovering since September.

     The economic impact of the terrorist attacks in Paris is "limited" for now, the governor said, pointing out that European markets have remained calm. However, he added, "we can't rule out the possibility that tourism or the Christmas shopping season will be affected." The central bank is watching for risks to the Japanese or global economy, either psychologically or via financial markets, he said.

     A U.S. interest rate hike, which looks increasingly likely to happen in December, "comes against the backdrop of the strength of the U.S. economic recovery and is desirable for the Japanese economy as well," Kuroda said. He expects the pace of tightening to be "extremely gradual" and suggested that he sees little risk of a blow to the global economy.

Disappointing investment

But all is not well for the BOJ's inflation scenario. Some indicators of inflation expectations "have recently shown relatively weak developments," Kuroda said. The central bank has called these expectations a key factor in determining inflation trends.

     Kuroda stressed that inflation expectations are "undoubtedly rising from a long-term perspective," citing higher prices for food and other items. While he said that the time frame in which inflation reaches the BOJ's 2% target will depend on crude oil prices, he reiterated his expectation that it will be achieved "around the second half of 2016."

     Capital spending has lagged somewhat compared with businesses' optimistic plans, he said. Businesses are putting off planned investment amid slowdowns in emerging economies and turmoil in financial markets. Companies had intended to boost capital spending by more than 8% in the six months ended in September, but capital expenditures rose less than 2% over that period, according to the BOJ's Tankan quarterly business survey. 

     Capital spending has been consistently lackluster since the central bank kicked off its unprecedented easing program in 2013. Because companies did not make major investments after the global financial crisis, their capital equipment is aging, Kuroda pointed out. "I think there could be very substantial [capital spending] growth for the fiscal year as a whole," he said.

Spotlight on wage talks

The central bank will watch next spring's wage negotiations closely, Kuroda said, noting that wage growth has been somewhat sluggish. "If wages don't increase, prices won't rise," he said.

     If slowdowns in emerging markets cause more companies to worry about the outlook for the economy, both capital spending and the next round of wage talks could be affected. Concerns have arisen that strong corporate profits will not boost investment and employee pay in the positive economic cycle that the central bank has tried to realize.

     Kuroda stressed that the drop in crude oil prices is "only temporary." He said he does not expect its impact on inflation to "decisively affect" wage negotiations, seemingly trying to block companies from using that reasoning to hold down wage growth.

     The governor also said he does not see the central bank's bond-buying running up against a wall, a concern that many have raised.

     The BOJ buys 80 trillion yen ($642 billion) in Japanese government bonds a year and now holds more than 300 trillion yen in the instruments. "We take the Bank of Japan's finances into consideration, but just because there's an impact doesn't mean we'll stop monetary easing," Kuroda said.

     Some have raised doubts that the central bank will be able to keep buying bonds easily, given the shortage of JGBs in the market. But admitting the program's limits could harm its ability to shape expectations.

     The decline in JGB buyers has pushed yields on short-term bonds into negative territory. Though Kuroda claimed he does not see this as a problem, the central bank is increasingly caught between a receding inflation target and the limits of its large-scale bond-buying.


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