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ECONOMY > Economic Policy

World economy ‘clearly’ on the rise — Q&A with BOJ’s Kuroda

  • December 29, 2016
  • , Nikkei Asian Review
  • JMH Summary

Bank of Japan Gov. Haruhiko Kuroda discussed everything from monetary policy to U.S. President-elect Donald Trump and the global economy in a recent exclusive interview with The Nikkei. The following are excerpts from the conversation.


Q: You said in a Monday speech to the Japan Business Federation, or Keidanren, that the global economy is “entering a new phase.” What does this mean?


A: Overall, the pessimistic views on the global economy from the first half of the year have changed dramatically. The economy is firming up quite a bit, so investors are shifting from risk aversion to risk taking. Donald Trump also won the U.S. presidential election in November, which has fed hopes for proactive fiscal policy and led to a more “risk on” market.


Even putting aside the Trump effect, the biggest thing is that the global economy is clearly headed toward a good direction. 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.

We are not at a point where we can say how far ahead of forecasts inflation could rise, but I can say that both the Japanese and global economies are entering a more upbeat, more favorable phase.


Q: In the speech, you said the Japanese economy is no longer in deflation, in that prices are no longer in a sustained decline. Is this similar to what the media would describe as an escape from deflation?


A: The government has been saying for quite some time that we are no longer in a deflationary state. But it probably can’t say that we have kicked deflation to the curb unless we are sure that we won’t slide right back into it.


While we no longer face a sustained decline in prices, the government cannot say that we can relax, that we will soon hit 2% inflation even if we sit tight and [that] there is no risk we will fall back into deflation. So the government has been saying that we are no longer in a deflationary state, and the bank agrees. But … 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.


Q: The dollar is strengthening and U.S. interest rates are rising, and Trump’s promised protectionism will eventually have negative effects as well. How tenable is this new positive phase in the global economy?


A: Even before Trump’s election, the global economy was no longer in a pessimistic mindset. The U.S., Europe, emerging economies and even Japan were headed in a positive direction, slowly but steadily accelerating their growth. This signals a change in the fundamentals, regardless of the Trump administration. But 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.


Many people are extremely concerned over the spread of protectionism. I understand why, given Trump’s campaign promises and [Britain’s] Brexit [vote to leave the European Union], among other factors. But the Group of Seven and the Group of 20, and even the International Monetary and Financial Committee, have consistently said they will not accept protectionism. Such a shift would undermine the international consensus that free trade will develop the global economy, leading to less poverty in developing nations and other developments. I personally don’t think we are at risk of succumbing to protectionism. There have been moves in that direction, but it is unlikely and unacceptable for the post-war progress toward free trade to be derailed completely.


Q: Let’s turn to monetary policy. The BOJ implemented negative rates in January and shifted its policy focus to interest rate targets in September. It seems to me that the bank’s quantitative approach has reached its limit.


A: I think there are still things we can do if necessary.

In quantitative and qualitative easing, later combined with negative interest rates and more recently with bringing down the entire yield curve, we considered both the size of the monetary base and interest rates. We used to focus mostly on the former, but now we are pushing the latter forward. In either case, our plan to pull down the entire yield curve, lower real rates in order to boost the economy, and eventually meet the 2% price stability target has not changed.


It is true that our method has changed from [annual bond purchases of] 80 trillion yen ($681 billion) to controlling the yield curve through a policy rate of negative 0.1% and a target yield of about zero on 10-year Japanese government bonds. But we will continue moving in the same direction as we have since April 2013, considering both quantitative and qualitative factors. The ultimate goal is to hit the 2% price target as quickly as possible. It’s not that policy board members have changed their minds regarding monetary easing, but that we are adjusting to changing circumstances in order to create a more appropriate yield curve.
Q: So the BOJ now has interest rate targets. I see how you can correct long rates that have fallen below appropriate levels, but it seems difficult to manipulate rates that have risen from a Trump-fueled rally.

A: Central banks traditionally were considered able and willing to manipulate short-term interest rates, but were expected to leave long-term rates to the market. In practice, the U.S., European and even Japanese monetary authorities have bought massive amounts of long-term government bonds since the 2008 financial crisis. The U.S. even purchased other types of long-term debt. We have successfully used such methods to directly affect long rates and shift the yield curve.

Recent economic troubles hit while short rates were at or almost zero, and we couldn’t just simply delve further into negative territory. So Japan and the U.S. and Europe decided to directly lower long rates through mass purchases of government debt. This is a different approach from traditional policy. But it ultimately shifts long rates and affects the economy, investment and consumption, so it still serves as a channel to impact the economy.


Central banks have overwhelming control over short rates. The current policy rate is what the BOJ has set for its current accounts, so we can do what we want with it. But for the yield on 10-year JGBs, or for any long rate for any country, we don’t have total control. So we need to buy long-term bonds with the aim of bringing rates near a target, like around 0% for Japan. If necessary, we will also use fixed-price purchasing market operations.


Q: Are we at a stage where fiscal, not monetary, policy starts to play the key macroeconomic role?


A: I have two points on this. First, a consensus exists within the G-20 and the IMFC in support of a three-pronged approach, or the use of monetary, fiscal and structural approaches in order to achieve stable and sustainable growth and to prevent deflation. In this sense, I see where you are coming from.


But Japan in particular is already using monetary tools, fiscal policy and growth strategies as the three arrows of Abenomics. It’s not really the case here that we were especially dependent on monetary policy and are now shifting to fiscal policy.


Internationally, G-20 members agreed immediately after the 2008 Lehman shock to implement fiscal stimulus. But countries especially in Europe soon shifted from a neutral to tighter fiscal policy, due to the European debt crisis and other factors. The U.S. government and Congress are controlled by different parties, which means the country cannot reach an agreement on fiscal policy.


Everybody — Japan, the U.S., Europe, China — drew on both fiscal and monetary stimulus in the aftermath of 2008, but fiscal measures fell behind in many countries. It is true that they are playing a very important role again in the U.S. and Europe, or in emerging economies, now that the three-pronged approach has returned to the spotlight. But it’s not the case that monetary policy no longer works [and] so we’re trying fiscal policy instead. Japan has always balanced fiscal, monetary and structural measures.


Q: But it is also true that Abenomics in the beginning focused very much on monetary policy in hopes of weakening the yen and raising stock prices. There’s a limit to what fiscal tools can achieve in Japan, and we can’t really tell whether the third arrow has launched.


A: Regarding the third arrow, or structural policies and growth strategies, women’s participation in the labor force has surged in the past four years. It’s still lower than in Europe, but now comparable to the U.S. This results from various government efforts to help women in the workplace and from unilateral deregulation. Some of it comes from an economic recovery, which reduced overall unemployment. But Japan has never before experienced such a rapid increase in female work participation, so I think the reforms are working to some extent.


The government is also taking on various other work-style reforms, as well as changes to medical and other social security mechanisms. They won’t yield immediate results, like fiscal or monetary tools, but I think we are seeing some difference. But if you say that the government should be doing more, I think that’s true.


Q: Some private-sector observers think the recent Trump rally could cool by spring, or in six months at the latest. Your recent statements suggest that the economy will be more stable next year, thanks to an improvement in the fundamentals.


A: Basically, I think that’s the case. We don’t know what economic policies the Trump administration will pursue, so there’s still some uncertainties. I don’t know whether he will cut taxes and invest in infrastructure as he promised, but such measures would help economic growth. On the other hand, his proposed restrictions on trade would be a negative.


We are all part of an extremely complex supply chain at this point, be it the U.S., Japan, Europe or China. Trade controls not only hurt others but also ourselves. This is why I personally don’t think the world will turn to excessive trade restrictions and protectionism. In this sense, the global economy is in an extremely strong position, especially the U.S., which has great innovative capabilities. We need to inject fiscal stimulus into such markets.


Q: Central bankers seem to be taking more risks than in the past, now that they are fighting deflation instead of inflation. What traits does a central banker need?


A: Central banks in advanced economies all have a certain level of autonomy from the government, and are headed by technocrats instead of politicians. Given this system, it is necessary for central bankers to remain unaffected by political movements, and to chart the best path toward stable prices and a stable financial system, which is the goal of every central bank.


I’ve only been [the BOJ] governor for three and a half years, though I was at the Finance Ministry for about 34 years and at the Asian Development Bank for about eight, so I can’t really say what makes a good central banker. But looking around the world, I think it’s important for us to analyze the situation and come up with logical policies as technocrats instead of politicians. We all have different backgrounds — some were university professors or came from private-sector financial institutions, while others spent many years at finance ministries like myself. But most are trying to live up to the kind of expectations I just described.


Q: Are you considering staying for another term?


A: (Laughter)


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