THE Bank of Japan (BOJ) will do whatever is needed "without hesitation" in order to achieve its 2 per cent inflation goal, including further monetary easing if necessary, governor Haruhiko Kuroda indicated on Thursday as the yen dipped past 107 to the US dollar for the first time in six years.
Mr Kuroda's comments came after he met prime minister Shinzo Abe for the first time in five months in what was billed as a routine lunch but which was viewed by markets as a joint strategy meeting designed to keep Mr Abe's economic growth policies known as "Abenomics" on track.
Abenomics is widely seen as becoming derailed in the wake of Mr Abe's decision to raise national consumption tax from 5 per cent to 8 per cent in April this year - a move that has caused a steeper than feared slump in economic activity.
Mr Abe is under strong pressure to go ahead with a further scheduled hike in the tax - to 10 per cent - next October in order to ward off what the International Monetary Fund (IMF) and others have hinted could lead to a fiscal crisis in Japan unless government revenues are boosted. Against this background, the BOJ is under strong pressure to come up with new forms of monetary accommodation to ward off any danger of Japan slipping back into deflation if and when the consumption tax is raised further.
The BOJ this week purchased financial securities from the market at negative interest rates - by paying above their redemption value - for the first time, taking it into unconventional forms of monetary easing, although the European Central Bank is also using such tactics to force-feed the economy with money.
These developments sent a strong signal to financial markets on Thursday that monetary policy will have to ensure that Japan's growth rate does not enter a new downward slide, analysts said.
Another message being read into the developments is that the yen will continue on a sharp downward trajectory as a result of further BOJ easing. The Nikkei 225 stock average rose 120.42 points on Thursday to 15,909.20 as this is seen as bullish for stocks.
The BOJ is anxious to fend off charges that it is taking instructions from Mr Abe's administration and that is in effect "monetising" Japanese public debt by purchasing massive quantities of government bonds. But the meeting between Mr Kuroda and Mr Abe added to this impression, some said.
By raising inflation expectations through a formal inflation target, the central bank is seeking to drive up consumption and investment in Japan to push economic growth to the annual 2-3 per cent level that Mr Abe wants to see achieved.
The BOJ is "treading (the) path toward price stability," Mr Kuroda told the prime minister on Thursday. But he emphasised in comments afterwards that "if we face difficulty achieving the goal, we would adjust monetary policy without hesitation, even if it takes the form of additional easing or anything else".
Last week, a senior BOJ official indicated that a decision on further easing could come as early as next month, and that such action would need to include some "surprise" elements if it is to have an impact on market sentiment.
It was not clear whether the BOJ's effective adoption of a negative interest rate strategy by purchasing what Reuters reported were three-month bills at above redemption value marks one such "surprise" move.
"Basically, I don't see any problem," BOJ deputy governor Kikuo Iwata was reported as saying on Wednesday during a visit to Kanazawa in central Japan. "I don't think this will cause any disruptions in BOJ's market operations," he added.
When the BOJ announced its aggressive quantitative and qualitative monetary policy (QQE) in April last year following Mr Kuroda's arrival at the helm of the bank, it said that its objective was to double the size of Japan's monetary base within two years, and to achieve 2 per cent inflation within that timeframe.