Bank of Japan governor says all available means will be used to beat deflation
Drop in bonus payments to workers shows hitting 2% inflation target will be difficult
Bank of Japan governor Haruhiko Kuroda said the central bank will use all options available to achieve its 2 per cent inflation target, reinforcing expectations of bold monetary stimulus ahead of his first policy-setting meeting on Thursday.
But his pledge for aggressive stimulus faced heat in parliament for relying too much on the psychological impact of any action, while a plunge in workers' bonus payments underscored the challenges the central bank faces in trying to put an end to nearly two decades of grinding deflation.
Prime minister Shinzo Abe also said he is not necessarily asking the BOJ to achieve its price target "at all costs," as factors beyond the bank's control, such as global economic developments, may sway future price moves.
"The economy is a living thing, so we don't know what could happen in the future. What's important is for the BOJ to make efforts toward its goal. If it can't meet the target, it has a responsibility to explain why. If it has a good explanation, that's fine," Mr Abe told parliament today.
Still, Mr Abe said he will not rule out as a future option a revision to the BOJ Law if it fails to meet its policy commitment. The law guarantees the central bank's independence from the government in guiding monetary policy.
Speaking a day before the start of the two-day rate review, Mr Kuroda reiterated his pledge of achieving the BOJ's inflation target in two years by taking aggressive monetary policy both in terms of the volume and type of assets it purchases.
"It is not easy to beat deflation, which has continued in Japan for 15 years. But the BOJ will use all options available and do whatever it takes to show markets its strong commitment," he told the same parliament committee.
The central bank is expected to ramp up its bond buying, extending the maturity of bonds it buys from the current three years, and debate an overhaul of its policy framework at the two-day rate review that kicks off tomorrow.
But Mr Kuroda sidestepped the question of how much the economy would need to grow in order for prices to rise by 2 per cent, when grilled by an opposition lawmaker that his plans may be relying too much on the psychological impact of easing policy.
It will take time for Japan's output gap to narrow enough to push up prices, but the BOJ can speed up the pace by heightening inflation expectations with aggressive easing, he said.
"It's important to communicate well our strong commitment to change market expectations. It's also important to meet expectations with action, so we will take bold easing measures," he said.
Under pressure from Mr Abe to take bolder action, the BOJ eased policy and doubled its inflation target to 2 per cent in January. But analysts doubt whether Japan can see such a level soon with consumer prices still barely rising.
Base money, or cash and reserves at the BOJ, jumped 19.8 per cent in March from a year earlier to reach 134.7 trillion yen (€1.13 trillion), exceeding the previous record hit in December last year, central bank data showed today.
Current account deposits commercial banks park with the BOJ soared 72.2 per cent to 47.4 trillion yen as the bank pumped money into the economy through asset purchases, the data showed.
But the huge pile of money has failed to end deflation or boost wages. Wage earners' total cash earnings fell 0.7 per cent in February from a year earlier as winter bonus payments declined the most in three years, a separate data showed today.
Some central bankers, such as former BOJ governor Masaaki Shirakawa, have also warned that by buying too much government bonds, the central bank can trigger a spike in bond yields by giving markets the impression it is monetising public debt.
New BOJ deputy governor Kikuo Iwata told parliament that it was important that Japan ensures its bond yields do not rise due to invesetors demanding an increased risk premium for holding debt.