Bank of Japan Gov. Haruhiko Kuroda has said the BOJ will not buy bonds just to keep down the government’s debt-servicing costs after it achieves its goal of stable 2 percent inflation.
“If we reach our target and prices are stable, we have no intention of moving away from our goal and implementing policy to reduce debt-servicing costs,” Kuroda said in the Diet Wednesday, in response to a question from opposition lawmaker and former economy minister Seiji Maehara, who claimed “the BOJ could be smacked around and told to do something” if yields rise.
Unprecedented monetary easing has helped suppress yields on 10-year government bonds to the lowest in the world even as inflation has accelerated to its fastest pace since 2008.
The challenge for Kuroda and Prime Minister Shinzo Abe will be to avoid any abrupt yield increases should a pickup in prices prompt the central bank to consider an exit from record bond purchases.
“Kuroda is delivering a message that the government must continue efforts to reduce Japan’s massive debt and that the BOJ won’t be a buyer forever,” said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute in Tokyo. “It’s clear Kuroda sees the need for another sales tax increase next year. Kuroda thinks the BOJ can cope with the economy if the tax hike puts it in danger.”
After the BOJ announced its program of massive quantitative easing last April, the yield on government bonds swung from a record low of 0.315 percent to as much as 1 percent in the space of a month.
The government raised the sales levy this month to 8 percent from 5 percent — the first increase since 1997 — as Abe pushes to rein in the world’s biggest debt burden. A further increase to 10 percent is scheduled for October 2015, pending a government decision later this year.
“The BOJ strongly hopes that the government will steadily work toward financial consolidation,” said Kuroda.
Deputy chief optimistic
A Bank of Japan deputy governor expressed confidence Wednesday that the economy is “resilient enough” to overcome the negative impact of the April 1 consumption tax hike, playing down concerns that the tax increase would push down personal consumption.
“Personally, I believe that Japan’s economy as a whole is resilient enough to absorb the effects of the consumption tax hike,” Deputy Gov. Hiroshi Nakaso said in a speech in Kyoto.
He attributed the strength to continued improvements in employment and income conditions as well as the absence of the kinds of problems that existed in 1997, the year of the last consumption tax hike, such as a fragile financial system.
To tackle gradual but persistent price declines, the central bank introduced “a decisive measure” of monetary easing in April last year, in concert with the launch of the government’s expansionary policy, to help end deflation, he said.
“Japan’s economy has gradually but steadily been escaping from deflationary equilibrium,” Nakaso said.
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