November 19, 2014 / 3:46 AM / 5 years ago

BOJ stands pat on policy, Kuroda hints at discontent over tax hike delay

TOKYO (Reuters) - The head of the Bank of Japan warned on Wednesday that the government is solely responsible for maintaining trust in the country’s finances, in a thinly veiled show of discontent over premier Shinzo Abe’s decision to postpone a sales tax increase.

Bank of Japan (BOJ) Governor Haruhiko Kuroda stands as he leaves a news conference at the BOJ headquarters in Tokyo November 19, 2014. REUTERS/Yuya Shino

While Haruhiko Kuroda avoided directly criticizing the delay in the tax increase, which had been slated for next October, he urged the government to meet its fiscal target and abide by last January’s agreement with the central bank.

Under that agreement, the BOJ pledged to hold responsibility for meeting its inflation target, while the government promised to take steps to fix Japan’s tattered finances.

“We hope the government steadily implements measures ... to create a sustainable fiscal structure,” Kuroda told a news conference on Wednesday after a central bank policy meeting.

“Fiscal discipline is the responsibility of the government and parliament, not that of the central bank,” said Kuroda, who had repeatedly urged Abe to proceed with the tax hike.

Abe announced on Tuesday that he would call an early election to seek a fresh mandate for his economic policies, and delayed a second increase in the tax by 18 months to April 2017.

Abe justified his decision by pointing to Monday’s data showing the economy unexpectedly slipped into recession in the third quarter due to the lingering impact on spending from a sales tax hike in April.

In a widely expected move, the BOJ voted to continue its massive stimulus efforts by purchasing more government bonds and risky assets to increase base money at an annual pace of 80 trillion yen ($683 billion).

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The postponement of the tax hike compounds problems for Kuroda, who already faces a divided board and markets that are questioning his credibility.

Board member Takahide Kiuchi, a skeptic of the current quantitative easing program, dissented to Wednesday’s policy decision in a show of his continued disapproval to last month’s surprise monetary easing that was made by a closely split vote.

Kuroda said last month’s easing was not intended to nudge Abe into proceeding with the tax hike.

“It was solely aimed at ensuring we achieve our 2 percent inflation target. I’ve never felt that (last month’s easing) was wrong or that we should have waited longer,” he said.

But the delay in raising the tax stokes worries that the BOJ’s ultra-easy monetary stance is bank-rolling an alarmingly high public debt, already the highest among major economies.

“The government’s decision to delay the sales tax hike has taken the BOJ further into monetization. This is an uncomfortable position for Kuroda,” said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management.”

UPBEAT VIEW INTACT

Despite the dismal third-quarter, the BOJ maintained its view that the economy remained on a moderate recovery trend, stressing that companies continue to raise wages and spending.

Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo November 19, 2014. REUTERS/Yuya Shino

But the second straight quarter of contraction will almost certainly force it to cut its forecast of a 0.5 percent economic expansion for the current fiscal year at a quarterly review of long-term projections in January, analysts say.

Sluggish economic growth will weigh on consumer inflation, which is still roughly half the 2 percent level targeted by the BOJ. Kuroda, who just a few months ago said core consumer inflation was unlikely to slip below 1 percent, acknowledged that level may be breached in the coming months due largely to slumping oil prices.

“Both prices and the economy are undershooting the BOJ’s forecasts. That will heighten market expectations of further easing,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

Additional reporting by Tetsushi Kajimoto and Kaori Kaneko; Editing by Kim Coghill

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