TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda stressed his resolve to maintain massive stimulus for a prolonged period but shrugged off the need to expand it soon, remaining upbeat on the outlook despite signs the economy may be in a mild recession.
Kuroda also stuck to his view that a weak yen is positive for Japan’s economy. But he slightly modified his tone by nodding to concerns from the business community that further yen declines will hurt small firms and households by boosting import costs.
“If the currency moves reflect economic and financial fundamentals, they should be positive, not negative, for the economy. But fundamentals themselves fluctuate, so it’s important to take this into account,” he said on Tuesday.
As widely expected, the BOJ maintained its pledge of increasing base money, or cash and deposits at the central bank, at an annual pace of 60-70 trillion yen ($547-$638 billion) via purchases of government bonds and risky assets.
The central bank maintained its view the world’s third largest economy continues to recover moderately as a trend. But it offered a bleaker view on factory output, saying it was “weakening” as a slump in demand after a sales tax hike in April left auto and electronic makers with a huge pile of inventory.
A government index gauging current economic conditions worsened in August, data showed on Tuesday, a sign the economy may be in recession as it suffers from the tax-hike hit.
Kuroda acknowledged that the tax-hike pain and bad summer weather had weighed on consumption longer than expected. But he stressed that after a temporary soft patch, growth will pick up enough to accelerate inflation toward the BOJ’s price target.
“Job and income conditions are steadily improving, and the effect of the sales tax hike is easing as a whole. Both for companies and households, a positive cycle of income and expenditure remains firmly in place,” he said.
“Our policy is exerting intended effects,” Kuroda added, signaling that he saw no need to expand monetary stimulus any time soon despite a slew of recent weak data.
But Kuroda also stressed that the BOJ’s quantitative and qualitative easing (QQE) won’t be automatically terminated when the two-year deadline for meeting its price target approaches.
“Rather, it’s an outcome-based program,” which means the BOJ will maintain QQE for as long as necessary to ensure inflation stays at, not just temporarily hits, 2 percent, he said.
An intense burst of monetary and fiscal stimulus, which were the first two “arrows” of Prime Minister Shinzo Abe’s strategy to end 15 years of deflation, has helped boost business sentiment by lifting share prices and weakening the yen.
But measures to enhance corporate governance and deregulate highly-protected medical and farm sectors, which are part of his “third arrow” growth strategy, have failed to impress markets.
With the tax-hike pain weighing on household spending, any further worsening of sentiment would complicate Abe’s crucial decision by year-end on whether to proceed with a scheduled second sales tax hike to 10 percent in October next year.
WEAK YEN DE-MERITS
Abe’s cabinet has also come under fire in parliament over the pain that the weak yen, generated in part from the BOJ’s massive stimulus, inflicts on households via rising import costs.
Kuroda himself was grilled in parliament from an opposition lawmaker on the yen when he was summoned to speak on Tuesday, a rare event that forced the BOJ to briefly interrupt its rate review for the first time in 16 years.
Abe and his cabinet ministers have recently started to comment on the disadvantages of the weak yen, largely on the need as politicians to pay heed to their local constituencies.
Kuroda, by contrast, has said a weak yen did not pose any big problem as it helps boost exporters’ revenues, which would trickle down to households through higher wages and jobs growth.
Given growing public attention, however, he shifted closer to the government’s line by talking not just about the merits, but the demerits, of yen declines.
“In general, a weak yen has some positive effect on exports and capital expenditure by pushing up revenues at companies with operations overseas. On the other hand, it’s true a weak yen weighs on non-manufacturers’ revenues by pushing up import costs,” he told parliament.
The central bank has stood pat on monetary policy since deploying an intense burst of stimulus in April last year, when it pledged to achieve its 2 percent inflation in roughly two years via aggressive asset purchases.
Still, the central bank may come under renewed pressure to expand stimulus if the economic weakness persists, analysts say.
After a surprise slump in August factory output, the BOJ cut its assessment on production, saying output has been weak due partly to inventory adjustments. It said last month that the trend in output was for a continued rise, albeit with some weaknesses.
Debate at Tuesday’s meeting lays the groundwork for a more crucial policy meeting on Oct. 31, when the nine board members issue new quarterly long-term economic and price projections.
Given signs of a delay in the recovery, they are likely to roughly halve their economic growth forecast for the current fiscal year from the present projection of 1.0 percent, the sources familiar with BOJ thinking said.
Additional reporting by Tetsushi Kajimoto; Editing by Kim Coghill