Japan committed to fight deflation, may expand stimulus plan

Bank of Japan Governor Haruhiko Kuroda on Tuesday stressed the bank’s readiness to expand stimulus further to meet its price goal, a message that was partially echoed by an European Central Bank policymaker as the Eurozone economy battles to lift off.

In a speech to business leaders, Kuroda stood firm in the face of criticism that last month’s unexpected monetary easing has accelerated unwelcome falls in the currency, saying that the “BOJ will continue to take action” to vanquish deflation.

But not all in the BOJ’s nine-member board share Kuroda’s optimism that the benefits of further stimulus outweigh the costs, minutes of last month’s meeting showed, suggesting that the central bank chief may struggle to push through more easing.

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Some BOJ policymakers opposed last month’s easing, warning that doing so would hurt the BOJ’s credibility if its bond-buying is seen as tantamount to debt monetisation, according to minutes of the BOJ’s October 31 meeting released on Tuesday

Nonetheless, Kuroda defended the Oct 31 easing as a necessary step to ensure the Japanese public shakes off its “deflationary mindset,” and to encourage companies to start investing and hiring more on expectations that prices will rise ahead.

“To achieve the price stability target, the BOJ has been taking ‘action’ and will continue to do so,” he told business leaders in Nagoya, a central Japan city home to auto giant Toyota Motor Corp.

While business executives present at the meeting generally welcomed the BOJ’s stimulus, some warned that recent yen declines were too rapid and were hurting smaller companies.

Kuroda declined to discuss how recent yen falls affected the overall economy, only saying that while a weak yen benefits exports, it hurts households and non-manufacturers by raising the cost of imports.

“We will carefully watch market moves, including currency moves, and their effect on the economy.”

The yen has come under renewed pressure since the BOJ stunned markets by expanding its quantitative and qualitative easing (QQE) programme last month. The dollar is hovering around 118.44 yen on Tuesday, after scaling a seven-year high of 118.98 yen last week.

Last month’s monetary easing was decided by a tight 5-4 vote after intense debate over why the BOJ ought to expand stimulus when it was clinging to the view the economy was recovering.

Since that meeting, economic data showed that Japan slipped into recession, and three of the four board members who opposed extra easing voted in favour at the subsequent meeting on Nov 18-19.

DEFLATION FIGHT

The BOJ has made some progress in pulling Japan out of 15 years of nagging deflation, but the euro-zone is drifting closer to deflation and now there are concerns that other economies, notably China and South Korea, also face deflationary risks.

European Central Bank policymaker Christian Noyer, speaking in Tokyo, said that the ECB needs to influence inflation expectations, which is a major component of the BOJ’s policy framework.

However, one area where the two central banks differ is the ECB has so far avoided the purchases of government debt that the BOJ has used to push down yields.

“Monetary policy must aim at influencing both nominal interest rates and inflation expectations,” Noyer said.

Advocates of the BOJ’s expanded debt purchases have said the central bank needed to act to prevent recent oil price falls from hurting inflation expectations, and in doing so ought to expand asset purchases at “as massive as scale as possible” to boost sentiment, the minutes showed.

But those opposed warned that further easing would accelerate yen falls and may not lift business sentiment, given interest rates were already very low, according to the minutes.

Another risk of the BOJ’s debt buying programme is that it could disrupt the functioning of the bond market because its purchases are so large, Deputy Governor Hiroshi Nakaso said on Tuesday.

Some institutional investors have had difficulty borrowing JGBs, but indicators of liquidity show no signs of major disruptions, he said.

Reuters