(Recasts with comments from speech)
By David Bailey
WAYZATA, Minn., April 19 (Reuters) - Bank of Japan Governor Haruhiko Kuroda said on Sunday that financial markets “could be surprised” if the central bank hits its 2-percent inflation target in 2016 and interest rates in Japan start to rise as a result.
Kuroda, who was speaking to a business group in Minnesota after the spring meeting of the International Monetary Fund and the World Bank in Washington, said the program of expansionary monetary policy the BOJ launched in 2013 and expanded in October was working as designed to crack deflation.
But he said there was a gap between the doubts in financial markets that inflation can be revived in Japan after nearly two decades of deflation and economic stagnation and the confidence at the BOJ that the central bank can hit its target of 2 percent inflation by early 2016.
“Market expectations of interest rates in the coming years are so low, while we expect, as I said, we can achieve the 2 percent inflation target in fiscal 2015 or early fiscal 2016,” Kuroda said, speaking in English. “That means that interest rates should gradually go up so ... the Japanese markets could be surprised.”
Kuroda said the BOJ expects inflation in Japan to “gradually accelerate” later this year as the impact of lower oil prices becomes less of a factor in the data.
“If underlying price dynamics (are) not what we are expecting than we do not hesitate to adjust or make additional monetary easing, but that is if necessary,” Kuroda said. “At this stage we don’t think it is necessary.”
Since April 2013, Kuroda has been steering BOJ policy toward achieving a 2 percent inflation target initially within two years, part of a program of monetary stimulus known as “quantitative and qualitative easing.”
But Japan’s core measure of consumer inflation has fallen for nine consecutive months through February, the most recent data available. That downward pressure on prices corresponds with widespread expectations that the central bank will have to increase its stimulus in the second half of this year.
In his speech on Sunday, Kuroda said the BOJ’s commitment to achieving 2-percent inflation was starting to affect the behavior of corporate planners and consumers and to crack what he described as an entrenched “deflationary mindset” in Japan.
As evidence of the success of the BOJ’s policies, Kuroda pointed to the increase in base wages announced by a range of companies like Toyota Motor Corp in recent weeks.
Kuroda said the BOJ was not counting on any further decline in the value of the yen to drive up the cost of imported goods in Japan and reach the 2-percent target for price increases.
“Our focus toward an inflation rate approaching 2 percent does not depend on any depreciation in the yen,” he said.
He added in response to a later question that he did not believe recent momentum toward a stronger dollar against other currencies would be sustained. “Personally, I don’t think the current dollar will continue to appreciate as it has appreciated in the last year,” he said.
Kuroda was invited to visit Minnesota by Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis.
Kocherlakota, who will step down from his position in 2016, has been an ardent defender of accommodative monetary policy in the United States. (Reporting by David Bailey; Writing by Kevin Krolicki and Jason Lange in Washington; Editing by Frances Kerry and Eric Walsh)