A week before the Bank of Japan’s policy meeting, BOJ Governor Haruhiko Kuroda on Wednesday said in his parliamentary testimony that the economy is still on track toward stable 2% inflation in line with the bank’s medium-term outlook presented in January.
Asked if the BOJ may have to continue buying Japanese government bonds to keep market interest rates low while keeping inflation higher than Japan’s past normal levels – thus no exit from aggressive easing – he said, “We won’t consider supporting fiscal policy by keeping borrowing costs low after we have anchored inflation at 2%.”
Fiscal reform is necessary for a sustained economic recovery, Kuroda said, and the BOJ is basing its policy and outlook on the assumption that the government will go ahead with its plan to raise the 8% sales tax further to 10% in October 2015.
He also told the Lower House Financial Affairs Committee that Japanese exports will pick up as temporary dampening factors will fade, easing the effects of slower growth in Asia.
Falling real interest rates, which are now estimated to be in negative territory, are expected to support consumption and investment, he said.
“New forecasts by the policy board members will be available at the end of the month but at this point, I think the economy is on a steady path toward 2% inflation,” he said, referring to the board’s fiscal 2015 median forecasts for +1.5% GDP and +1.9% CPI (excluding the impact of the sales tax hike) in the bank’s semi-annual Outlook Report due on April 30.
“But as I have repeatedly said, we would not hesitate to take necessary policy actions if it deviated from the 2% inflation track.”
Asked to specify what additional easing the BOJ may conduct, Kuroda replied that the BOJ has various policy tools but what measures to take depends on the conditions of the economy and financial markets at the time.
The BOJ board is widely expected to leave the monetary policy target and asset purchases unchanged at its April 30 meeting. Some economists forecast the BOJ will conduct more easing in July if data show a slump in demand after the April sales tax hike is sharper than expected.
Despite some improvement in capital spending, the pace of bank lending to major firms has decelerated because they have ample cash reserves, said the governor.
But he also said lending to smaller firms is growing and that bank lending overall is expected to rise along with the current economic recovery.
The current economic recovery has been led by strong domestic demand, including private housing investment, which has led to increased borrowing by real-estate firms, Kuroda said.
“In conducting monetary policy, we are checking risks but at this point, no excessive activity in the real estate markets or imbalance in financial markets is observed,” he said.
But the BOJ will watch the real-estate markets as they triggered the asset bubble of the late 1980s, he added.
Kuroda repeated that the recent sluggish Japanese exports are mainly due to slower demand in Southeast Asia and other Asian countries, the key markets for Japanese goods.
In March the pace of year-on-year increase in Japanese exports decelerated sharply to 1.8% from 9.8% in February and 9.5% in January, partly because carmakers had to meet strong domestic demand before the sales tax hike. During the winter months, demand in the U.S. was also hit by severe weather conditions.
“These temporary factors will fade,” Kuroda said.