NAGOYA – Bank of Japan Gov. Haruhiko Kuroda said Tuesday the central bank is closely watching the impact of the yen’s sharp fall against other major currencies following the bank’s additional monetary easing announced last month.
Speaking to a meeting of business leaders in Nagoya, Kuroda said the weakening currency could negatively affect the economy through rising prices of imports, which place a disproportionate burden on smaller companies and households, although positive aspects include improved earnings for firms operating internationally.
The impact “differs from one economic entity to another,” he said. “We will carefully watch (the environment), including effects on the real economy.”
Kuroda also expressed his hope that companies benefitting from the yen’s depreciation, which has been prompted by the BOJ’s ultraloose monetary policy, will help spur the economy by boosting wages or increasing business investment.
While stressing the need to continue battling chronic deflation, Kuroda said some “changes” are underway in the corporate sector, where some business leaders are sounding more bullish in their price-setting and employment strategy.
“The rise in base pay this spring, which took place for the first time in many years, is a prime example of this,” he said. “In this sense, I have great interest in developments in wages and price settings through spring of next year.”
The BOJ last month expanded its “quantitative and qualitative easing” stimulus program, increasing the massive asset purchases from banks to provide more money to the economy and lift the inflation rate to its goal of 2 percent within the next fiscal year, starting April 1.
Kuroda’s request for additional wage hikes comes amid growing skepticism among market participants that the bank can turn around the country’s deflationary mindset with monetary policy alone.
The BOJ chief urged business leaders to use profits more productively, saying hoarding cash will become costly as the central bank stamps out deflation.
Companies could boost investment in facilities and jobs, taking advantage of a weaker yen, Kuroda said. At the same time, the BOJ will continue to spur price gains, adjusting its unprecedented easing policy as needed to achieve its inflation goal, he said.
Japanese companies are headed toward their highest profits ever as the weaker yen boosts exporters such as Toyota Motor Corp.
Japan Inc. holds near-record cash while capital spending in the second quarter was more than 50 percent lower than a peak in the first three months of 2007.
“Kuroda is making it clear it’s the turn of companies to act,” said Mari Iwashita, an economist at SMBC Friend Securities Co. “Capital spending, wages and price settings are all vital for the BOJ but are out of its hands. Kuroda must convince companies the economy will get better and deflation will end.”
Kuroda last week secured a wider board majority for easing that the BOJ boosted on Oct. 31, and warned that the central bank’s key gauge of inflation could fall below 1 percent after the economy slid into recession.
Falling prices over two decades of stagnation made holding cash a viable option for companies looking for safety and real returns on capital. The BOJ has been making steady progress in shaking a “deflationary mindset,” Kuroda said.
He called on business leaders to take “action” that looks toward an economy that has overcome deflation.
“As a corporate strategy, using their profits in a more productive manner is imperative,” Kuroda said. “I have great interest in developments in wages and price settings through spring of next year.”
The BOJ aims to stoke 2 percent increases in consumer prices, excluding fresh food and the effects of changes in the consumption tax. Core inflation by that measure is forecast to slow to 0.9 percent in October, according to a survey of economists.
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