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February 3, 2016 7:27 am
‘No limit’ to Japan easing, says Kuroda
Robin Harding in Tokyo
Governor of the Bank of Japan (BoJ) Haruhiko Kuroda explains his negative interest rate plan using a board during his regular press conference in Tokyo©Getty
Haruhiko Kuroda said there was “no limit” to monetary easing as he vowed to slash Japanese interest rates deeper into negative territory if necessary.
In his first speech since last week’s surprise cut in interest rates to minus 0.1 per cent, the Bank of Japan governor said there was more room to ease, and that he would invent new tools rather than give up his goal of 2 per cent inflation.
“Going forward, if judged necessary, it is possible to cut the interest rate further from the current level of minus 0.1 per cent,” said Mr Kuroda, pointing to the Swiss National Bank at minus 0.75 per cent and the Riksbank at minus 1.1 per cent, as examples of what the BoJ could do.
The speech raises the chances of future monetary easing in Japan, signalling that Mr Kuroda is fully committed to negative interest rates despite ruling them out for months before a sudden change of heart.
In a paean to the magnificence of central banks — delivered despite the global weakness of inflation — he declared they were close to conquering the problem that interest rates cannot go below zero.
“The constraint of the ‘zero lower bound’ on a nominal interest rate, which was believed to be impossible to conquer, has been almost overcome by the wisdom and practice of central banks, including those of the Bank of Japan,” said Mr Kuroda.
“It is no exaggeration that [ours] is the most powerful monetary policy framework in the history of modern central banking,” he said.
The Bank of Japan policy now combines negative short-term interest rates with annual asset purchases of Y80tn, equivalent to 16 per cent of gross domestic product, driving down interest rates across the yield curve. A lack of lending opportunities means it has not stimulated much growth in credit, however.
Inflation in Japan is running close to zero because of slumping oil prices. In a vivid demonstration of why the BoJ was pushed into further easing, January saw the percentage of consumers expecting no inflation a year ahead rise to the highest level since Mr Kuroda began his stimulus.
The BoJ governor insisted Japan’s economy was still on a path of moderate growth with strong underlying pressure on prices. He said the BoJ had eased policy to shore up business sentiment and offset weakness in commodity exporters and emerging markets.
“At this stage attention is warranted to a significant risk that, in the case where business sentiment deteriorates, reflecting uncertainty over overseas economies, firms might revert to acting based on a deflationary mindset,” said Mr Kuroda.
He said the BoJ’s decision to keep paying interest to banks on most of their reserves would avoid any damage to the financial system. Offering higher prices would induce holders to keep selling government bonds to the BoJ’s asset purchase programme, he said.
“This is a unique policy framework of negative interest rates that fits well into the Japanese system,” he said.
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