Bank of Japan governor Haruhiko Kuroda last night came out strongly in defence of unconventional monetary policy, saying that its positive impact on the US and UK economies was clear, while also arguing that quantitative easing had been unjustly blamed for creating capital market turbulence.
In an exclusive interview with Emerging Markets, he also expressed optimism that Japanese prime minister Shinzo Abe’s Abenomics policies could succeed and that China could maintain annual growth rates of between 6% and 7% this year and in 2016.
Unconventional monetary policy has come in for mounting criticism for its impact on capital flows and exchange rates, but Kuroda argued these phenomena already existed under conventional monetary policy, and that the impact had simply been a “matter of degree”.
The Group of Thirty said in a report published yesterday that “unconventional monetary policies have played an important role in the management of recent crises” but that “deeper studies are still needed to ascertain their longer term benefits and unintended consequences”.
The US and UK would likely to be the first to normalise monetary policy, while the ECB and the Bank of Japan would do so later, said Kuroda. “All of those four economies have benefited from their respective QEs,” he argued.
“The eurozone and Japan are recovering moderately but their inflation rates and inflation expectations are still low, so for the time being the Bank of Japan and the ECB will continue their respective QEs,” he said.
Unconventional monetary policy has a short history, so central banks’ experiences have been limited. Experience of conventional monetary policy, on the other hand, had been accumulated over a century, Kuroda noted, although Japan pioneered the concept of zero interest rate policies in 1999.
“The potential impact of unconventional monetary policies could be less certain, but with the accumulation of experience we have become less uncertain,” Kuroda maintained. “We at the BoJ think that QQE [quantitative and qualitative easing], which started in March 2013, has been having its intended impact on the financial market and the economy.”
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Meanwhile, Kuroda argued that there was “no direct connection between central bank asset purchases and capital inflows and outflows”.
“There is no unique character of unconventional monetary policy” in influencing such flows, he insisted. “There is no substantial difference.”
“Of course, we have to be careful and we have to monitor” the situation, he said.
Kuroda said he was still confident about the beneficial impact of QE on the Japanese economy. He cited the fact that Japan’s corporate sector is enjoying record levels of profit and that “the corporate sector has a very strong investment plan”.
On the sharp depreciation of the yen under the BoJ’s QE, Kuroda argued that this was simply a “correction of previous excessive appreciation” of the yen. The currency soared to a record high of ¥75 to the dollar in 2011 but has since fallen to around ¥120.
The BoJ governor also rejected arguments by those he called “Western economists” who argued that Japan was placing excessive reliance on monetary policy. Monetary policy was sharing with fiscal policy and economic structural adjustment the burden of boosting Japan’s economy, he said.
On China, he noted that the Chinese government had committed itself to economic reforms. He endorsed the IMF’s forecast that the world’s second largest economy could continue to grow at 6.8% this year and 6.3% in 2016.