The Bank of Japan’s aggressive monetary easing steps are working to achieve an exit from more than a decade of deflation, BOJ Gov. Haruhiko Kuroda said Friday, while vowing to avoid volatility in long-term interest rates.
“What is most important is to influence the real economy through various channels and bring a virtuous circle in three fields — output, income and spending,” he said in a speech in Tokyo. “In such a circle, we are aiming for prices to rise gradually. It can be realized and we are on course to realize it.”
The BOJ’s monetary easing steps, including doubling the monetary base within two years and boosting bond purchases introduced in April, are based on the view that they are “necessary and sufficient” to achieve a 2 percent inflation target in about two years, Kuroda said.
He refrained from expressing his views on the stock and foreign exchange markets, saying the BOJ has no targets for them. On the government bond market, with which the bank is directly involved through bond purchases, Kuroda said it is “extremely desirable” for the long-term bond market to move stably.
“With our flexible (bond buying) operations, we’d like to avoid volatility in long-term interest rates that had been rising temporarily,” he said, adding the BOJ plans to enhance communication with market participants.
His remarks came after the yield on the bellwether 10-year Japanese government bond briefly soared to a one-year high of 1 percent Thursday, as investors shifted their funds to stocks.
On the domestic economy, the BOJ chief said recovery is expected to become clear soon and the rate of growth is likely to increase gradually in the future.
On the China, where the pace of growth appears to be slowing down, Kuroda said he is “watching closely” the development and expects the economy to make a soft landing to realize stable growth, placing emphasis on quality.
Kuroda said the Asian economy is likely to expand further as it transforms itself into a “consumption center” from a “manufacturing base,” a move that is expected to change the nature of the supply chain, stimulate new demand and foster new industries.
To promote further growth, Japan can make contributions through trade, investment and financial cooperation, Kuroda said, adding that enhancing growth in the region would also be beneficial for Japan and other Asian economies.
Kuroda said the BOJ’s monetary easing policy “will lead Japan’s economy to overcome the deflation that has lasted for nearly 15 years and reinvigorate the economy,” vowing to contribute to the growth of the Asian economy.
Abe fears rate spike
Prime Minister Shinzo Abe expressed concern Friday that a spike in Japan’s long-term interest rates could drag down the economy, as financial markets have recently become volatile due in part to the Bank of Japan’s massive fund injections into the market.
If interest rates soar, that could “greatly affect the economy, public finances and the people’s lives,” Abe told a Diet session.
“The government will carry out debt-management policies in an appropriate manner and steadily take measures to ensure a sustainable fiscal structure,” he said.
Emphasizing the importance of the BOJ’s role in allaying turmoil in the market, Abe said the government is “aware that (the central bank) has closely communicated with market participants about overall market transactions, including monetary market operations.”
His comments came as stock and government bond markets have fluctuated widely, with the 225-issue Nikkei stock average tumbling 7 percent Thursday and the yield on the bellwether 10-year Japanese government bond briefly rocketing to 1 percent the same day, its highest intraday level since April last year.
A surge in long-term interest rates could lead to rises in interest rates on housing loans and corporate borrowings, sparking anxiety that it may impede economic recovery.
BOJ Gov. Haruhiko Kuroda said in a speech later Friday that it is “extremely desirable” for the long-term bond market to move stably and vowed to avoid volatility in long-term interest rates by conducting bond-buying operations “flexibly.”
Analysts said financial markets have become unstable as the BOJ’s credit easing has triggered a huge money inflow to them from across the globe.
Finance Minister Taro Aso said earlier Friday that Japan will try to boost its credibility by pulling the economy out of nearly two decades of deflation.
“Japan’s credibility would increase if it can end its prolonged recession coupled with asset deflation” by implementing the “three arrows” of Abe’s economic policies, Aso said.
His remarks suggest policymakers believe share prices will bounce back amid lingering expectations of economic recovery.
The three arrows, collectively dubbed “Abenomics,” are composed of drastic monetary easing, large-scale public works projects and a growth strategy, which the government has promised to flesh out in mid-June.
Economy, Trade and Industry Minister Toshimitsu Motegi also indicated he believes Thursday’s stock plunge was not caused by fears about the outlook for Japan’s economy.