BoJ will withdraw stimulus if economy overheats: Iwata

Haruhiko Kuroda, governor of the Bank of Japan (centre), attends a news conference with Kikuo Iwata, deputy governor of the BoJ (left), at the central bank’s headquarters in Tokyo. Iwata signalled yesterday the possibility of withdrawing the massive monetary stimulus if the economy overheats and nudges up inflation well above its 2% price target.

Reuters/Tokyo

Bank of Japan deputy governor Kikuo Iwata signalled yesterday the possibility of withdrawing the central bank’s massive monetary stimulus if the economy overheats and nudges up inflation well above its 2% price target.

Iwata voiced confidence that Japan was making steady progress in meeting the central bank’s inflation goal with prices rising not just because of a weak yen, which inflates import costs, but strength in domestic demand.

He also said heightening inflation expectations in Japan would help prevent excessive rises in the yen, which had weighed on the export-reliant economy during 15 years of deflation.

While he stressed the BoJ’s resolve to maintain ultra-loose monetary conditions for as long as needed to beat deflation, Iwata said the central bank’s current stimulus programme also aims to prevent excessive inflation.

“The BoJ’s current policy intends to prevent not just deflation but inflation from well exceeding 2%, such as to 4% or 5%, for a medium- to long-term period,” Iwata told a seminar.

“If the economy overheats and inflation exceeds 2% on a permanent basis, we will adjust policy,” he said. “On the other hand, if our price goal is distant and prices don’t seem to be approaching the target, we will adjust policy the other way” by expanding stimulus, he added.

Since deploying its “quantitative and qualitative easing” (QQE) programme in April last year, the BoJ has remained silent on when it could consider withdrawing the stimulus for fear of diluting its message that it is determined to end nearly two decades of economic stagnation.

Iwata’s comments, the first from a senior BoJ official directly mentioning the chance of withdrawing QQE, reflects the growing confidence within the central bank that Japan is winning the battle against deflation.

The BoJ has repeatedly said the economy is recovering strongly enough for consumer inflation to hit its 2% target by around April next year, when its two-year time frame for meeting the goal expires.  While core consumer inflation has reached 1.3% in March, market players remain sceptical on whether price gains will accelerate from here as quickly as the BoJ predicts.

Still, the BoJ’s optimistic view of the economy and prices have led market players to scale back expectations of imminent monetary easing.

Iwata said that while the BoJ will support the economy by stimulating demand, it was the government’s job to boost Japan’s long-term growth potential by implementing structural reforms.

Economic growth will remain subdued even if the BoJ achieves its price target, unless the government proceeds with structural reforms, he warned.

Meanwhile, Bank of Japan board member Takehiro Sato proposed changing the central bank’s assessment of prices to say that risks are tilted somewhat to the downside, highlighting scepticism within the board that Japan would be able to decisively beat off deflation in a year’s time.

The minutes of the April 30 policy meeting released yesterday showed Sato had also called for changing the wording of the central bank’s price target, suggesting a loosening of BoJ’s commitment to achieving its 2% inflation goal by the end of the next fiscal year.

The proposal was rejected by an 8-to-1 vote, with the BoJ maintaining its stance that risks to prices are finely balanced. However, Sato’s views highlight the lingering uncertainty about the price target that could cause the central bank to alter its bullish forecast later in the year.  “Inflation is likely to slow as the impact of yen depreciation from last year falls out of the year-on-year comparison,” said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co.

“Once this happens it will be difficult for the BoJ to maintain its aggressive outlook. Sato is merely trying to offer a more honest description of prices.”

The BoJ aims to achieve 2% inflation in about a year from now with an aggressive quantitative easing scheme it put in place last year.

Sato has expressed his doubts about this target before, but taking the additional step of making a proposal to change the central bank’s language places him in a group with other sceptical board members Sayuri Shirai and Takahide Kiuichi.

Shirai and Kiuchi have repeatedly proposed changes that would loosen the timeframe for achieving 2% inflation or limit the central bank’s commitment to continuing with its massive purchases of government debt and risk assets.

None of their proposals has won any supporters, which shows that the remaining six members of the board form a solid core that is committed to the price stability target.

Still, signs of disagreement on the board highlight the fact that there are still many sceptics more than a year after the BoJ overhauled its monetary policy to end 15 years of mild deflation.

At the meeting on April 30, the BoJ left policy unchanged and issued consumer price forecasts for fiscal 2016/17, which show it expects to comfortably meet its inflation target.