TOKYO — Bank of Japan Gov. Haruhiko Kuroda remains committed to achieving steady price growth of 2% as he enters his second term, but the path to bringing stubborn deflation to heel remains fraught with challenges.
Kuroda emphasized the 2% target in a Monday news conference after his reappointment by Prime Minister Shinzo Abe. But the central bank has pushed back its time frame for reaching this goal six times, most recently to around fiscal 2019, and the consumer price index excluding volatile fresh foods grew just 1% in February.
The central bank began increasing its holdings of Japanese government bonds by 50 trillion yen ($467 billion at current rates) a year in April 2013, raising the figure about 80 trillion yen in 2014. This “new dimension” of monetary easing helped to soften the yen, turning around exporters’ fortunes and supporting the recovery that began in December 2012 under Abe and his signature economic program.
Yet even as the economy has grown, prices have barely budged. Looking back on his first five-year term, Kuroda acknowledged that the economy and prices “change based on various factors and are difficult to fully predict.”
And the more the central bank does to bolster prices, the worse the side effects. Low interest rates have encouraged lax fiscal discipline by reducing the cost of servicing debt. Long-term debt owed by Japan’s central and local governments totaled 1.09 quadrillion yen at the end of fiscal 2017. Years of the BOJ holding down rates have caused “major delays in fiscal rehabilitation,” said Ryutaro Kono of BNP Paribas Securities (Japan).
Many analysts worry that the central bank’s dominance in the government bond market is interfering with its functioning. The bank’s JGB holdings swelled to 450 trillion yen last month — roughly 40% of the outstanding total — from 125 trillion yen in March 2013.
Ending deflation will remain the BOJ’s focus for Kuroda’s next five years at the helm. Though the central bank maintains that 2% price growth can be achieved next fiscal year, private-sector economists see inflation coming in 0.5 percentage point lower.
Further headwinds lie ahead, including a potential trade war between the U.S. and China. The BOJ will monitor the situation closely, said Kuroda, who noted that “trade policy can affect not only the countries involved, but also the global economy” as a whole.
Turmoil in international politics tends to spur flight to assets seen as safe, including the yen. The Japanese currency has strengthened by 6 yen against the dollar so far this year to around 107 now. A stronger yen typically exerts downward pressure on domestic prices with a lag of six months to a year.
A planned increase in the consumption tax to 10% from 8% in October 2019 poses another likely obstacle. The central bank “must monitor the impact and respond appropriately on the monetary policy side,” Kuroda said.
Abe reportedly pressed the BOJ governor to keep monetary policy loose when the two spoke on Monday. He said that given the drop-off in consumer spending that followed the previous hike in April 2014, it will be important to reinforce the “three arrows” of Abenomics — shorthand for fiscal expansion, monetary policy and regulatory reform.
Kuroda responded that the central bank would need to keep an eye on the impact on financial intermediaries. If the BOJ keeps rates low to stimulate the economy, financial institutions will still struggle to grow their profits.
The governor will be 78 when his second term ends, leading some to voice concern about his age. But Kuroda stressed that he intends to serve out his full term.