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No one’s being overly bullish yet, Kuroda says

Bloomberg

Bank of Japan Gov. Haruhiko Kuroda said Sunday he saw no signs of “excessively bullish expectations” in asset markets and the nation can cope with rising interest rates, provided the economy improves.

The comments by the 68-year-old central banker came after stocks slumped on Thursday by the most since the March 2011 earthquake and 10-year yields touched 1 percent, more than triple the record low on April 5.

While the BOJ’s expanded asset purchases are intended to bring interest rates down, an increase of as much as 3 points in yields could be acceptable, Kuroda said in a speech in Tokyo.

Stock and bond volatility threaten to sap confidence in the campaign by Kuroda and Prime Minister Shinzo Abe to jolt the world’s third-biggest economy out of a 15-year deflationary malaise. Policymakers need to sustain momentum after growth accelerated to the fastest pace in a year in the first quarter and the Topix Index rose 39 percent this year, a gain pared by Thursday’s 6.9 percent plunge.

Kuroda “wants to send a green light to those who are bullish on Japan’s markets and economy,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo and a former central bank official. “There’s no way he will throw cold water by showing his concern at a time when there are signs of positive developments” in the economy, Adachi said.

Kuroda was speaking to the Japan Society of Monetary Economics at Hitotsubashi University, where he was once a professor, two months after taking over as BOJ governor with a pledge to do whatever it takes to defeat deflation. On April 4, he unveiled a plan to double money in the economy over two years by ramping up bond purchases, chasing a target of 2 percent inflation.

There’s “no sign at this point of excessively bullish expectations in asset markets or in the activities of financial institutions,” Kuroda said. Citing an April BOJ report that examined the possible effects of a 1 to 3 point increase in interest rates, he said that “there are no major concerns over possible instability in the financial system,” provided prices and economic activity gain.

The central banker also referred to the risk of yields rising because of concern over the sustainability of Japan’s debt, which the International Monetary Fund estimates could reach 245 percent of gross domestic product this year, and urged the government to make progress on fiscal measures.

The has yen weakened about 19 percent against the dollar in the past six months, aiding exporters such as Toyota Motor Corp., the world’s biggest automaker, and causing friction with nations including Asian rival South Korea.

Paul Krugman, a 2008 Nobel laureate in economics, said last week that the one-day stock slump didn’t alter his assessment that Abe’s policies are showing signs of working and could serve as an example for the world.

“For if Abenomics works, it will serve a dual purpose, giving Japan itself a much-needed boost and the rest of us an even more-needed antidote to policy lethargy,” Krugman wrote in the New York Times on Friday.

Kuroda said Sunday that the economy is expected to return to a moderate recovery path around the middle of the year, backed by domestic demand and a pickup in the global economy.

In Japan, Abe and Kuroda want to fuel prices, wages and growth without triggering a jump in debt-servicing costs that will make the nation’s debt burden unsustainable. In December, Abe led his Liberal Democratic Party to victory in elections by pledging to fire “three arrows” to end stagnation: monetary stimulus, fiscal spending and cutting regulation to increase investment and hiring. He faces a July election in the Upper House, where the LDP is currently in a minority.