Kuroda Signals BOJ May Delay Hitting Inflation Target to 2018

(Bloomberg) -- Governor Haruhiko Kuroda gave the clearest signal yet that the Bank of Japan may postpone the forecast date for achieving its 2 percent inflation target to 2018, even with economic growth set to accelerate next year.

“It may take slightly more months to reach the 2 percent inflation rate” than the current forecast to hit it in the coming fiscal year, Kuroda said in an interview with Bloomberg Television’s Francine Lacqua on the sidelines of an annual gathering of finance chiefs in Washington. “We have to carefully study all relevant statistics before we review the forecast. So we may change, we may not change.”

A delay would signal the BOJ would fail to reach its objective during Kuroda’s term, which concludes in April 2018. That would raise the stakes for either the governor’s reappointment or the selection of a successor who’s committed to sustaining his unprecedented scale of monetary stimulus in the world’s No. 3 economy.

As for Kuroda, 71, he left no doubt about his view that the BOJ is in the stimulus business for the long haul, and may even take further actions to stoke the price pressures that central bankers envision will spur spending and lending.

“We will continue or even strengthen our monetary easing in coming months and years to achieve 2 percent inflation,” Kuroda said in the interview recorded Saturday, during which he questioned the value of the idea of buying foreign bonds, and declined to specify whether the BOJ would sell Japanese government securities as part of its new yield-curve targeting policy.

The BOJ chief flagged that cheaper oil costs and weakened public expectations for consumer prices had sapped inflation in Japan, speaking a little over three weeks before board members are due to revise their economic projections.

This would be the fifth delay to the price target since Kuroda launched his stimulus campaign more than three years ago. Even so, “the economy is likely to accelerate,” Kuroda said. Expanded fiscal spending from Prime Minister Shinzo Abe’s administration will help get Japan’s economic growth rate to about 1.5 percent next year, from around 1 percent this year, he said.

Kuroda’s remarks came as global officials attending the International Monetary Fund and World Bank’s annual meetings repeated their call for governments to unleash new spending and push through reforms to reinvigorate growth, amid signs that the impact of monetary policy is waning.

The governor highlighted the “unique” approaches adopted by the BOJ last month, with its inflation overshooting pledge and targeting of both short-term and long-term rates. Financial markets now appear to understand the BOJ’s program, he said, after the unexpected adoption of a negative short-term policy rate in January.

Even so, investors have been clamoring to know if the central bank would sell Japanese government bonds to secure its new zero percent target for 10-year yields. Kuroda said that JGB purchases could be increased or decreased as the BOJ manages the yield curve. He said this was “a technical matter.” 

The policy intention is to keep expanding the monetary base through asset purchases, he said. True “tapering” of policy would be part of an exit strategy that’s not currently being contemplated, according to the governor. “I don’t think we can reduce the JGB purchase program soon.”

Controlling Yields

While Kuroda said he’s confident the policy to control the yield curve will succeed, there may be times when rates miss the target. “I don’t say that we can completely control the 10-year interest rate,” he said. “But from our experience, we can basically influence and manage the long-term interest rate to be around zero percent.”

He also reiterated that the BOJ could reduce short-term and long-term rates further as part of any strengthening in stimulus.

The BOJ’s credibility isn’t wholly dependent on meeting its inflation goal, he said later on Saturday at the Brookings Institution. Kuroda’s efforts -- part of the broader Abenomics initiative that includes fiscal stimulus and structural reforms -- have altered Japan’s trajectory. The country is no longer in sustained mild deflation, bank lending is increasing and the jobless rate is near the lowest in two decades, which may help to fuel much-needed wage growth. The trend in nominal gross domestic product is the best since the 1990s.

Still, one former BOJ official who has been a close adviser to Abe criticized last month’s move away from quantitative expansion as a setback, given continuing deflationary pressures. Another senior Abe aide, Etsuro Honda, has applauded the new approach, though days ago called on the BOJ to expand easing at the Oct. 31-Nov. 1 meeting.

Foreign-exchange and equity markets have moved against policy makers this year, eroding some of the benefits of monetary easing. The yen has surged about 17 percent against the dollar since the beginning of 2016, while the Topix stock index is on course for its first annual decline since 2011, down about 13 percent.

The BOJ has been monitoring the yen, given its impact on the economy, but Kuroda reiterated that policy isn’t geared toward guiding the exchange rate. Asked about the idea of buying foreign bonds, he said that in Japan, buying or selling foreign bonds is “exchange-market intervention," which is decided by the Ministry of Finance, not the BOJ. Other than to influence the currency, such buying would act to reduce overseas interest rates, spurring the question of “what is the purpose of buying” such securities for Japan, he said.

--With assistance from Enda Curran and Yoshiaki Nohara To contact the reporters on this story: Brett Miller in Tokyo at bmiller30@bloomberg.net, Francine Lacqua in London at flacqua@bloomberg.net. To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Paul Panckhurst