IN his first major policy speech since becoming governor of the Bank of Japan (BOJ) earlier this year, Haruhiko Kuroda yesterday laid out a bold vision of the country's economic prospects, arguing that deflation was being overcome, economic growth was on track and employment and wage trends were improving.
Mr Kuroda has maintained a relatively low profile since taking office despite his key role in launching the "first arrow" of Prime Minister Shinzo Abe's "Abenomics" strategy. Yesterday, he emerged from the shadows to defend the BOJ's record in contributing to the country's improving economic situation.
The highly upbeat tone of his public remarks is likely to reassure financial markets that Abenomics is still firmly on track, analysts said.
"What I recognised when I assumed the role of the governor of the Bank of Japan in March this year was that we must bring Japan's economy out of deflation that has lasted for almost 15 years," he told business leaders in Osaka.
"The greatest challenge facing Japan's economy in the immediate future is a prompt overcoming of deflation, and the role the bank has to play to that end is critical."
The BOJ's policy of quantitative and qualitative monetary easing "has been steadily exerting its intended effects", he said.
"Japan's economy is expected to grow above its potential as a trend, amid a continued virtuous cycle among production, income and spending, and is likely to steadily follow a path towards achieving a 2 per cent price stability target," he noted.
"Since the turn of the year, real GDP has registered high growth of about 4 per cent on an annualised basis for two consecutive quarters (and) while exports have generally been picking up at a somewhat slower pace, domestic demand, notably private consumption and public investment, has been firm," he said.
"Domestic demand is likely to maintain firmness as external demand is expected to increase the virtuous cycle among production and income, and spending is likely to be maintained. Japan's real GDP growth in fiscal 2013 is now projected (at) 2.7 per cent, partly reflecting a front-loaded increase in demand prior to the consumption tax hike."
"What sets Japan's current economic recovery apart from past false dawns is that it is domestic demand-led, with the non-manufacturing sector as the main driver," the BOJ governor noted.
Mr Kuroda rejected criticisms by many economists that Abenomics policies were not leading to an increase in wages and personal consumption cannot continue to increase in this situation.
He said the employment situation continued to improve moderately but steadily, with both the unemployment rate and the ratio of job offers to applicants having almost recovered to the level before the Lehman shock. "There has also been an increasing sense of a labour shortage on the firms' side," he added.
"This improvement in the employment situation has started to influence wages. The year-on-year rate of change in nominal wages per employee has gradually stopped declining on the whole, partly due to growth in summer bonuses for the first time in three years."
The improving trend in the employment situation is likely to continue as the economy recovers moderately, and nominal wages per employee are expected to be put under upward pressure gradually, Mr Kuroda argued.
"From a somewhat longer-term perspective, wages will likely show a clear uptrend as the effects of tightening supply and demand conditions in the labour market emerge and inflation expectations rise."
Abenomics has also been criticised on the grounds that it is not leading to any significant improvement in private capital investment.
Mr Kuroda dismissed this criticism as well.
"Reflecting the major feature of the economic recovery this time, business fixed investment has been resilient in the non-manufacturing sector," he noted, adding that there were also signs of improvement in the manufacturing sector.
Responding to concerns that the proposed two-stage hike in the national consumption tax from next April could derail economic recovery, Mr Kuroda said: "While there will be a swing due to the front-loaded increase and subsequent decline in demand, Japan's economy is likely to continue growing at a pace above its potential, as a trend."