TOKYO The Bank of Japan has not run out of measures to support growth but sees the economy emerging from a lull, Governor Masaaki Shirakawa said on Monday, reinforcing views that an imminent monetary easing is unlikely.
He was also cautious about significantly boosting the central bank's government bond purchases, which he warned could give markets the impression that it was directly financing government debt.
Shirakawa added that easy monetary policy alone could not end deflation and fix other problems plaguing Japan's economy, and called for deregulation and other efforts to more efficiently allocate labor and capital and boost economic growth.
"I won't say we've exhausted monetary easing measures. Having said that, we have to redouble our efforts to boost the potential growth rate," he told a news conference.
Shirakawa, in a rare appearance before foreign journalists in Tokyo, reiterated that boosting the size of the central bank's asset buying fund would be an option if economic conditions turned out substantially worse than forecast.
But he added that the economy seemed to be improving.
"As for the future, everything depends on the course of the economy. The economy is now exiting from a temporary pause. We are now observing good signs," Shirakawa told the Foreign Correspondents' Club of Japan.
"If the economy deteriorates materially from our projection, then additional purchases (of assets) could be conceivable. But the decision should be made after weighing the benefits and the costs," he said.
Japan's economy probably rebounded in the first quarter after an expected slight contraction in the final quarter of last year, as companies restock inventories and exports recover from a soft patch.
Last month, the central bank slightly nudged up its price forecast for the year starting in April, although it has stuck to its view that a recovery from grinding deflation will be long and slow.
"Shirakawa is growing more upbeat on the economy with leading indicators pointing to an improvement in overseas growth. Rising share prices and a halt in yen gains are helping too," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
"This doesn't mean the BOJ will roll back its comprehensive easing steps any time soon. But it will maintain its current policy stance for the time being, rather than examine additional easing steps."
WON'T BOOST BOND BUYING YET
The BOJ last year cut interest rates effectively to zero and created a 5 trillion yen ($61 billion) pool of funds to buy assets ranging from government bonds to private debt, aiming to support a fragile economy and pull Japan out of deflation.
BOJ officials have said topping up the scheme is a clear option if risks to growth materialize, although expectations of an imminent monetary easing have diminished on growing signs Japan's economy will soon emerge from a lull.
Still, the central bank is expected to maintain rates effectively at zero based on its pledge that it will do so until price stability, which it views as consumer inflation of around 1 percent, is in sight. It expects Japan to achieve core consumer inflation of 0.3 percent in the year beginning in April and 0.6 percent in the following year.
Deflation has plagued Japan for over a decade, hurting the economy by encouraging households and businesses to delay spending, making it harder for the government to bring down its huge public debt.
Shirakawa said Japan could ill afford to be complacent about its debt burden even if it faced no immediate funding pressures and called on the government to cut spending and increase tax revenues.
"It is often pointed out that JGBs are largely absorbed by domestic private savings, which contributes to low and stable long-term interest rates," he said. "However, as history shows, no country can continue to run fiscal deficits forever."
In the near term, the central bank sees limited risk that a possible setback in efforts to fix Japan's finances caused by a looming political deadlock, would trigger a sharp enough rise in bond yields to require drastic action on its part.
Sources familiar with the central bank's thinking have said a spike in yields would make it consider various options, including boosting its purchases of long-term government bonds.
Shirakawa, however, signaled the BOJ would be reluctant to go down that path to avoid giving markets the impression it was bankrolling government spending.
"We do not want to be seen as a central bank which is financing deficits of the government," he said. ($1=82.17 Yen) (Additional reporting by Tetsushi Kajimoto, Editing by Edmund Klamann and Tomasz Janowski)