Haruhiko Kuroda insisted today that he would stick to his monetary policy course, despite mounting criticism of the Bank of Japan governor as the early gains from Abenomics appear to have petered out.
Kuroda’s massive surge of quantitative and qualitative easing, launched in March 2013 —seen around the world as a brave but risky experiment — has boosted the Japanese stockmarket, ended deflation and got GDP rising. But growth has slowed, and even fell nastily in the second quarter of 2014.
In an interview with Emerging Markets, Kuroda shrugged off allegations that the Bank of Japan’s policies were hurting, rather than helping the world’s third largest economy.
He also defended the divergence in monetary policy by the world’s four largest central banks, which has been seen as a danger, and insisted the global financial system was not on the verge of crisis.
“The Fed and the Bank of England have already started [monetary] normalisation, whereas on the other hand the European Central Bank and the Bank of Japan continue their [accommodative] policies, reflecting differences in their economic situations,” he said. “But that does not create any problem.
“I think this non-synchronised way of monetary normalisation and monetary policy management is quite justified. A synchronised exit from unconventional policy by all central banks could be much more difficult for some emerging market economies.”
He acknowledged potential liquidity problems in global bond markets, and the high financial leverage of emerging market non-financial companies, as highlighted in the IMF’s latest Global Financial Stability Report.
“But the [GFSR] concluded that in the absence of any major financial shock, leverage at this stage does not appear to be at critical levels,” Kuroda observed. “Emerging and developing economies should continue to monitor the situation, but we are not yet in a critical situation.”
The BoJ’s aggressive monetary easing, aimed at achieving a 2% inflation rate within two years, has led to a sharp fall in the yen. But while this has raised import costs, it has not stimulated exports as much as hoped.
Then a hike in Japan’s national consumption tax in April this year sent personal spending and economic growth plunging in the second quarter — leading many Japanese to doubt the economic policies of both prime minister Shinzo Abe and Kuroda.
But Kuroda said that despite the 7% GDP slump in the second quarter, the economy still grew by 1.3% in the first half of this year, compared with the same period last year.
“The trend is moderate recovery, which we think will continue,” he said. “Why? Because we think that the corporate sector in Japan is enjoying strong business conditions and achieving a high level of profit, and these good business conditions are continuing. The corporate sector is increasing capital investment.
“Also, for the first time in the past 10 years or so, the corporate sector has agreed to provide a base wage increase,” he added. “The household sector is also enjoying quite a robust income situation.”
WAGES GROW
The BoJ has been criticised lately — even by Abe — for a possibly excessive yen depreciation. But Kuroda insisted that “yen depreciation so far has been broadly in line with fundamentals and financial conditions. And that will be beneficial to the economy.”
Japan’s export volume had been “rather flat”, Kuroda admitted, but he attributed this in part to weak external demand, especially in East Asia, where more than 50% of Japanese exports go. Much Japanese manufacturing production has also moved offshore, limiting the benefit of a cheaper yen.
But the weaker currency had still helped Japan, Kuroda insisted, by raising profitability in yen terms, whether from exports or from profits remitted from overseas production.
Kuroda has been pressured to extend the March 2015 deadline for achieving his inflation target. But Kuroda made it clear he intends to stay on track. “We are still half way there —around 1.25%,” he said. “Our target is 2%, so we will continue our quantitative and qualitative easing until we achieve the target.”