TOKYO -- Bank of Japan Gov. Haruhiko Kuroda stressed Tuesday that while the country is still far from achieving the 2% inflation target, it's definitely on the right track.
Kuroda, approaching his third year in the post, is counting on the current round of wage increases to start off a virtuous cycle of demand in Japan.
Gains in the consumer price index have shrunk due to cheap crude prices. Kuroda, in a news conference after the Tuesday monetary policy meeting, acknowledged that price levels may turn "slightly negative." But this does not mean it will be more difficult to meet the 2% target "in or around fiscal 2015," he said.
Japanese companies are raising wages for the second year in a row, which is keeping the central banker bullish. Toyota Motor is increasing its base monthly pay by 4,000 yen ($32.67), while Nissan agreed to a 5,000 yen hike.
"The environment is ready for wage hikes, considering recent employment conditions and corporate earnings," Kuroda said. He expressed hope that the trend will spread to smaller businesses.
The BOJ launched massive purchases of Japanese government bonds under its quantitative and qualitative easing measures, in a display of its dedication to meeting the 2% target. The financial market has been completely transformed by a weak yen and high stock prices, and corporate performance has increased greatly. The consumption tax hike last April slowed the economy down, but things are looking up again.
But Kuroda's initial goal -- to achieve the 2% inflation target in around two years -- is looking highly unlikely. Many economists believe it would be difficult to meet even the current timeline centered around fiscal 2015.
Kuroda still remains optimistic, believing that the stage is almost set for Japan's price levels to start rising again. Real wages had been sinking due to the tax hike and the soft yen, but Kuroda thinks the figure "will likely see greater gains" in April, when the impact of last year's consumption tax hike runs its course.
The Japanese economy is at a turning point in which increased wages and cheap crude oil may or may not give rise to a virtuous cycle fueled by consumption and investment.
It's not the 2% inflation target that's important, but rather fostering stable growth and a gradual rise in prices. If the BOJ launches additional easing to bolster inflation quickly, the yen could weaken further, squeezing households and smaller businesses. It still needs to strive for its inflation target, but over a medium- to long-term horizon.
The government also has a number of duties to fill. The potential growth rate of the Japanese economy is said to be only about 0.5%. Unless that figure can be lifted, a small shock could easily cause the economy to contract. And the BOJ's purchases of JGBs will only seem more like an attempt at financing government debt unless Tokyo can present a road map for better fiscal discipline.
The government and the central bank must work together to amplify the benefits of easy monetary policy, and to prepare for an eventual exit strategy.