Bank of Japan Governor Haruhiko Kuroda said Monday that the government’s growth strategy and private-sector investment should lead a move toward higher economic growth potential.
He also told a meeting of the Japan Association of Corporate Executives that the BOJ will support such initiatives by turning the deflationary mindset of the recent past into more dynamic economic activity based on 2% inflation.
But Kuroda said even if the potential growth rate does not rise, the BOJ would not be deterred from guiding the economy toward stable 2% inflation “as soon as possible.”
“I believe that by steadily pursuing QQE (quantitative and qualitative easing), the bank can achieve the target of 2%… through improvements in the output gap and a rise in inflation expectations,” he said.
“The bank’s mission to ensure price stability remains unchanged irrespective of the level of the potential growth rate.”
The governor repeated that the BOJ will “pursue monetary policy management on its own accord to achieve the price stability target of 2% at the earliest possible time.”
Through the summer (roughly from July to September), the year-on-year rate of increase in the CPI is expected to slow to around 1% from 1.5% in May (excluding the direct impact of the April sales tax hike) as the weak yen’s effects of pushing up imported energy costs wane, he said.
“Subsequently, as trend inflationary pressure continues to strengthen, the year-on-year rate of increase in the CPI is expected to follow an upward trend again from the second half of this fiscal year and reach around 2% — the price stability target — around the middle of the current projection period from fiscal 2014 through fiscal 2016, that is, in or around fiscal 2015,” he said.
In response to questions, he denied the possibility that lower imports of oil and gas, which may be brought on by possible resumption of nuclear power generation in Japan, would lead to a trade surplus and a stronger yen, which in turn would enhance deflationary pressures.
“It is a fact that forex rates affect prices, but in the medium to long term, the influence of forex on prices is not so big,” Kuroda said.
“Forex is affected by various situations. In the medium to long term, it is set by financial market conditions. In the long term, prices affect forex.”
The government’s target of achieving real 2% GDP growth is “ambitious but not impossible,” Kuroda said.
He called for deregulation and other government measures to bring more women, older people and foreigners into the workforce and resolve structural worker shortages in aging Japan.
The BOJ will continue with QQE to achieve stable 2% inflation as long as it is necessary for maintaining that target in a stable manner, said Kuroda.
“If the outlook changes due to the manifestation of some risk factors, the bank will make adjustments without hesitation if this is judged necessary for achieving the price stability target,” he said, repeating his recent remarks.
Kuroda expects the economy to achieve an inflation rate of around 2% and thereafter shift to a growth path that sustains such inflation in a stable manner.
This outlook is based on his theory that the output gap is likely to improve steadily and medium- to long-term inflation expectations are likely to rise, which is turn will influence actual wage and price setting.
“Domestic demand is likely to remain firm and exports are expected to increase moderately and the virtuous cycle among production, income and spending is likely to be maintained,” Kuroda said.
“For the next three years or so, Japan’s economy as a trend is likely to continue growing at a pace above its potential, although growth will be affected by fluctuations in demand associated with the two rounds of consumption tax hikes.”