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BOJ's Kuroda, confident on inflation, urges govt to raise tax again
September 4, 2014 / 3:21 AM / 3 years ago

BOJ's Kuroda, confident on inflation, urges govt to raise tax again

TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda urged the government to proceed with another sales tax hike to fix its finances and, despite acknowledging some weakness in the economy, remained confident the central bank would hit its inflation target.

A security guard salutes at the entrance of the Bank of Japan building in Tokyo January 22, 2014. REUTERS/Yuya Shino

A recent run of weak Japanese data, including a slump in household spending and tepid factory output growth in July, has cast doubt on the BOJ’s view the economy will pick up steadily after the pain inflicted by a first sales tax rise in April.

“Exports and output are showing weak movements,” Kuroda told a news conference after a policy meeting on Thursday at which the central bank left its huge monetary stimulus programme unchanged.

“But job and income conditions are improving steadily and household confidence is firm. Companies, reflecting improving earnings, are maintaining their bullish investment plans. A positive economic cycle remains in place,” he added.

A former top currency diplomat, Kuroda said falls in the yen were not necessarily bad for the world’s third-largest economy, shrugging off the concern of some analysts that further weakness could hurt growth by pushing up import costs.

He remained optimistic that the economy was gradually pulling out of 15 years of deflation and was on its way to hitting his 2 percent target for inflation sometime during the next fiscal year beginning in April.

However, the central bank cut its assessment on housing investment and warned that factory output remained weak, a nod to pessimists on its board who fret there may be only a modest rebound in the economy after a big second-quarter contraction.

Overall, the central bank maintained its view the economy would continue its steady recovery, with consumption set to benefit from a tightening job market that is pushing up wages.

Kuroda said households would boost spending again once the pain from the tax hike faded, suggesting no additional monetary stimulus would be forthcoming any time soon.

His optimism stands in contrast to growing doubts among private-sector analysts that the economy can grow strongly enough to see consumer price inflation, now around 1.3 percent, accelerate toward the central bank’s target.

Some lawmakers are calling on Prime Minister Shinzo Abe to delay a second sales tax increase scheduled for October 2015, citing the bigger-than-expected hit from the first increase.

Kuroda, however, warned that postponing it could undermine market trust in Japan’s finances and trigger a spike in bond yields that would be hard to control with fiscal and monetary policy tools.

“It’s very important for Japan’s fiscal state and for its economy that steady progress is made in efforts to restore fiscal health,” he said.

The BOJ stuck with its “quantitative and qualitative easing” framework, under which it has pledged to increase base money by 60-70 trillion yen ($571-$666 billion) per year through aggressive asset purchases to reflate the long-moribund economy.


Offering some relief to policymakers, Japan’s Nikkei stock average hit a seven-month high this week on hopes that a cabinet reshuffle by Abe on Wednesday would give fresh momentum to his growth-oriented policies.

Abe told reporters after the reshuffle that pulling Japan out of chronic deflation remained his top priority and that a decision on whether to proceed with the second increase in the sales tax depended largely on data in coming months.

Japan’s economy shrank by an annualised 6.8 percent in the second quarter, more than erasing a first-quarter surge in the run-up to the sales tax increase. Analysts polled by Reuters expected a 3.8 percent bounce this quarter.

The BOJ is likely to cut its economic growth projection for the current fiscal year when it reviews its long-term forecasts in October, but it will keep its bullish price forecasts as a tighter job market nudges up wages, sources say.

“The BOJ is saying that right now parts of the economy are weaker than expected, but it still expects growth to accelerate in the future,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

“It is possible the BOJ will downgrade this fiscal year’s GDP forecasts, but as long as it expects healthy growth for next fiscal year, I see no change to its policy stance.”

Exports have failed to pick up despite the boost from a weak yen, disappointing BOJ officials and dragging on growth. Some pundits thus argue that further yen falls may do more harm than good by pushing up import costs for Japanese companies.

Kuroda dismissed that view, adding that it was natural for the yen to weaken against the dollar at a time when the BOJ was keeping monetary policy ultra-loose but the U.S. Federal Reserve was moving closer to raising rates.

Additional reporting by Stanley White and Tetsushi Kajimoto; Editing by William Mallard and Alan Raybould

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