NUSA DUA, INDONESIA – When the Bank of Japan is finally ready to signal the start of an exit from its massive monetary stimulus, the shift will be seen in its target rate, Gov. Haruhiko Kuroda said in an interview.
While he stressed that policy settings will remain at their current rock bottom levels for now, the comments on what an exit will one day look like were among his clearest yet.
“When two percent inflation target is met or is close to be met, of course we can change the target, the monetary operating target of interest rate,” Kuroda said when asked in an interview with Bloomberg television how the central bank would signal an exit. “At this moment, inflation is only one percent, so we will continue the current yield curve control at the current level of interest.”
Asked in a follow-up question to confirm if a change in the interest rate would be a definite signal of a policy shift, he said: “That’s right.”
Kuroda has generally been reluctant to give details of how the bank might go about exiting policy. Previous comments by the governor on the bank’s exit plans have caused sharp movements in the yen and bond prices.
In March, Kuroda’s comments saying that the BOJ may find itself thinking about exiting monetary stimulus in the year starting in April 2019 caused the yen to surge. Economists have also continued to highlight the sharp slide in the bank’s bond purchases as a sign the bank has normalization of policy in sight.
In July, Kuroda and his board made the most significant tweaks to their policy framework in two years in a bid to give them more flexibility as they continue their stimulus. The bank also said it would keep interest rates extremely low for an extended period of time, helping calm speculation that a policy change could be on the horizon amid rate hikes in the U.S. and moves toward tighter policy in Europe.
Most economists now don’t expect the BOJ to change policy until at least 2020, but they are still keen to know how the bank will signal its intentions.
Kuroda said that people should focus on the bank’s yield curve control and not the amount of bonds the bank is buying as a potential signal for an exit.
“It’s only yield curve control,” he said. “The amount of JGB purchases is no more the monetary operating target.”
The central bank controls short and long term interest rates by applying a minus 0.1 percent rate on specific deposits held by commercial banks at the BOJ and by buying bonds to keep the yield on 10-year Japanese government debt at about zero. Through these rates the bank ensures yields across a wide range of time frames remain incredibly low.
Kuroda’s comments further underscored that a promise by the bank to buy ¥80 trillion of Japanese government bonds each year was now only a symbolic commitment to buy a large amount. The bank’s purchases are now close to half that pace.
Sporting a batik shirt on the sidelines of the International Monetary Fund’s annual meetings in Bali, Indonesia, Kuroda said a continuation of recent wage gains would be ‘critical’ in the BOJ’s quest to reach its inflation target of two percent.
“Basically I think wages would be the main sustainable factor for inflation,” he said, noting that wage growth had been accelerating in recent months. ‘Whether this continues or not is very critical for the tow percent inflation target.”
Speaking on some of the big issues discussed at the IMF meetings in Bali, Kuroda said trade conflicts were a frequent topic, though no clear conclusions were reached about how to resolve them. Still, he said he expected the U.S. and China to eventually reach a compromise, as trade wars tend to hurt all countries involved.
In the face of growing protectionism, it is essential to continue international dialogue with renewed recognition of the importance of free trade, Bank of Japan Gov. Haruhiko Kuroda said.
The global economy has continued to expand but if trade tensions are prolonged or intensify they could hurt the real economy and financial markets, not only through trade activities but also through deterioration in sentiment among businesses and households, Kuroda said.
When he spoke at the same event a year earlier, the global economy was quite rosy and the biggest risk was complacency, Kuroda said.
“The recent rise of protectionist moves and tightening of financial conditions in some economies remind policymakers of the importance of being vigilant at all times,” Kuroda said.
“We should pay more attention to protectionist moves as global economies have become increasingly interdependent through global value chains,” he said.
Touching on currencies, Kuroda said the dollar, yen and euro were at levels not far from those justified by economic fundamentals. U.S. Treasury Secretary Steven Mnuchin has called for a currency clause that would prevent competitive devaluations to be included in any trade agreement with Japan.
Kuroda said Japan’s sales-tax increase scheduled for next October wouldn’t have the same effect on the economy as the hike in 2014. The rise set for next year would be only two percentage points and food would be excluded, he noted, so the impact could be as little as one third or a quarter of that from the 2014 tax hike.
The government’s planned spending on free education and care for young children should also help, he said.