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ECONOMY > Economic Policy

BOJ chief upbeat on global economy, sees Trump as wild card

  • December 30, 2016
  • , Nikkei Asian Review
  • English Press

The Bank of Japan has had a rocky year. It introduced its negative interest rate policy in January, drawing criticism from many corners. It doubled its purchases of exchange-traded funds in July. And in September, it announced it would try to control long-term interest rates, an impossibility according to the conventional wisdom.


All this was an effort to fight the pessimism overshadowing the global and domestic economies. One could argue it was all for naught: It was Donald Trump’s victory in the U.S. election in November, and hopes for his stimulus plans, that seemed to finally blow away the gloom.  


“The pessimistic views on the global economy from the first half of the year have changed dramatically,” BOJ Gov. Haruhiko Kuroda said in a rare exclusive interview with The Nikkei.


To be sure, there were signs that conditions were improving before Trump’s surprise win. Kuroda noted that “the U.S., Europe, emerging economies and even Japan were headed in a positive direction, slowly but steadily accelerating their growth [before Trump’s victory].”


“Looking ahead to next year … I think the global economy is clearly headed toward a good direction,” he added.


His optimism is shared by global financial institutions. The International Monetary Fund, which has made a habit of downgrading its economic forecast with every release, refrained from doing so when it published the latest edition in October. The Organization for Economic Cooperation and Development upgraded its global outlook for 2017 in a recent forecast.


In a recent speech, Kuroda said the global economy has reached a “new phase.”


The brighter all-around mood has driven up Japanese stock prices and weakened the yen. Both are welcome developments from the BOJ’s perspective.


Reflecting the change in global sentiment, Kuroda said in the interview, “Japan’s exports and production are picking up, and private consumption is showing signs of strengthening. Japanese stock prices are even on the rise, and the excessive strength in the yen is being corrected. … I think this means that the obvious recovery in the global economy, as well as a less ‘risk off’ market, will greatly benefit the Japanese economy next year.”


This “new phase” for the global economy does come with some risks, however. One concern is the potential for a further rise in isolationist and protectionist sentiment — and the policies that could result. Europe is headed for a series of elections, and there is a good chance that populist parties and candidates will gain power.

With the U.S. president-elect advocating protectionism himself, the spread of such policies could seriously hinder the global economy.


Kuroda is wary of this. He stressed that while, fundamentally, the global economy is on the right track, “it is true that uncertainties remain over what policies Trump will actually pursue, how Europe’s political landscape could change given a number of upcoming elections there, or whether emerging economies and resource-based countries can continue accelerating their growth.”


Deflated ambition

The governor also sounded cautious about Japan’s potential for reaching 2% inflation. This was out of character for a man who had always put on a brave face when questioned on the subject. After all, the whole idea behind the BOJ’s target was to make the public believe inflation would be the norm; the leader of that policy could hardly afford to appear bearish.


The government and the BOJ cannot say that “there is no risk we will fall back into deflation,” Kuroda admitted in the interview while fidgeting with a document. “I think we are still not in a condition where we can say we have escaped deflation, or that we can achieve the 2% price stability target.”


Much of the world is coming to grips with the understanding that monetary policy alone cannot push inflation higher. Many economists emphasize the need for fiscal expansion and drastic structural reforms, both of which fall in the remit of the government.


Kuroda defended the government, noting that Abenomics has included fiscal stimulus measures — implying that calls for bigger fiscal outlays should not apply to Japan.


On structural reforms, Kuroda said, “Women’s participation in the labor force has surged in the past four years [under Prime Minister Shinzo Abe],” adding, “This results from various government efforts to help women in the workplace and from unilateral deregulation. … I think the reforms are working to some extent.”


Kuroda did make a request. “If you say that the government should be doing more, I think that’s true,” he said with a laugh. “It is really important to reform the labor market, to change the way we work.”


Having fallen far behind schedule in pursuit of 2% inflation, the BOJ needs all the help it can get.

When Kuroda & Co. introduced aggressive monetary easing in April 2013, the plan was to hit the 2% inflation mark in two years. The BOJ now sees inflation reaching the target “around fiscal 2018.”

Kuroda’s term ends in April 2018. It is looking more and more likely that he will leave office before achieving his primary goal, unless he is reappointed by the cabinet.


Asked at the end of the interview if he is aiming for a second term, Kuroda just laughed and left the room.

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