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BOJ Kuroda strikes back at QE critics, defends price goal timeframe

Friday, February 27, 2015 - 14:46
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Bank of Japan Governor Haruhiko Kuroda defended his two-year timeframe for achieving his ambitious inflation target, warning that adopting a relaxed approach to the deadline would undermine efforts to break the country out of the shackles of deflation.

[TOKYO] Bank of Japan Governor Haruhiko Kuroda defended his two-year timeframe for achieving his ambitious inflation target, warning that adopting a relaxed approach to the deadline would undermine efforts to break the country out of the shackles of deflation.

Mr Kuroda, a former finance ministry bureaucrat, also urged the government to stick to its commitment to fix Japan's tattered finances, dismissing an idea floated by key government advisers to water down its fiscal reform goals. "The BOJ won't respond to oil price moves themselves but will closely monitor how they affect inflation expectations," Mr Kuroda said in a news conference on Friday, signalling his resolve to ease policy again on any signs of change in trend inflation.

The remarks sit uneasily with growing calls from within the BOJ board to do away with the strict timeframe as slumping oil prices push inflation further away from its goal.

Kuroda said setting a timeframe was crucial to change people's expectations, pull Japan out of a "deflationary equilibrium" and re-anchor inflation expectations at 2 per cent. "Considering Japan's unique situation ... it was important to attach a timeframe for meeting the target," Mr Kuroda said. "In order to escape from a deflationary equilibrium, tremendous velocity is needed just like when a spacecraft moves away from the Earth's strong gravitation," he said.

When deploying its massive stimulus in April 2013, the BOJ pledged to double base money via aggressive asset purchases to hit 2 per cent inflation in roughly two years.

But core consumer inflation stood at 0.3 per cent in the year to January due to weak demand and falling oil costs. The BOJ has already watered down the timeframe to say inflation will hit 2 per cent in the year beginning in April, but even this is considered by many analysts as too ambitious.

Mr Kuroda also pushed back against a proposal, made by members of a key government panel, to set a new fiscal discipline target focusing more on boosting economic growth than on spending cuts.

Japan's current target is to return to a primary budget surplus, excluding debt servicing costs and income from bond sales, in fiscal 2020 through tax hikes and spending cuts.

The academics say Japan should instead focus on reducing the debt-to-GDP ratio. Critics say this would allow lawmakers to call for fiscal stimulus and avoid unpopular spending cuts. "Achieving the primary balance target is just a first step. Only through this would Japan think about gradually reducing the debt-to-GDP ratio," Mr Kuroda said.

REUTERS