(Reuters) - Bank of Japan Deputy Governor Hiroshi Nakaso said the country was eyeing an end to deflation as rising wages and inflation expectations allow companies to increase prices of their goods, signalling confidence over a sustained economic recovery.
But he voiced caution over sluggish exports and stressed that it was premature to debate an exit strategy for the BOJ's massive stimulus programme, signalling the central bank's resolve to keep pumping money aggressively to accelerate inflation toward its 2 percent target.
"The conquest of deflation in Japan is now in sight. We are, however, only halfway toward achieving the price stability target of 2 percent," Nakaso said in a speech to business leaders in Shizuoka, eastern Japan, on Wednesday.
The former career central banker is the only member within the current BOJ board who was involved in the central bank's exit from its previous five-year quantitative easing in 2006.
The BOJ cannot use the same strategy it used back in 2006 to end the current stimulus -- dubbed "quantitative and quantitative easing" (QQE) -- as its balance sheet is bigger and is loaded with debt with longer durations, Nakaso said.
"But we already have various tools to withdraw liquidity," he said, adding that how to use these tools and in what order would depend on economic and price conditions at the time.
The BOJ has left policy unchanged since unleashing an intense burst of stimulus in April last year, when it pledged to pull Japan out of chronic deflation and push up consumer price inflation to 2 percent in roughly two years.
Core consumer inflation has gradually accelerated since then, hitting 1.4 percent in the year to May when excluding the effect of a sales tax hike in April.
The BOJ has said inflation will slow in coming months due largely to the base effect of last year's spike in energy costs, before accelerating again toward its 2 percent target.
Many market participants doubt prices will rise that much and some have speculated that if the inflation rate dips below 1 percent in coming months, the BOJ could be forced into easing policy further to ensure the target is met.
Some analysts, however, warn that if inflation accelerates toward 2 percent as the BOJ projects, that may heighten speculation the central bank will taper its asset purchases.
Nakaso warned markets against focusing too much on monthly price moves, stressing that what was more important was that the mechanism for pushing up prices was falling in place, such as a narrowing output gap and heightening inflation expectations.
He also said the decline in household spending after the sales tax increase had been within expectations, in line with the central bank's baseline scenario that the economy continued to recover moderately mainly on robust domestic demand.
The comments came after a recent slew of weak data cast doubt on the BOJ's scenario of an investment-driven economic recovery. Household spending and machinery orders, a leading indicator of capital spending, both tumbled in May, underscoring the fragile state of the recovery.
EXPORTS DISAPPOINT
Japan's economy clocked its fastest pace of growth in more than two years in the first quarter as consumer spending jumped and business investment turned surprisingly strong ahead of a sales tax hike in April to 8 percent from 5 percent.
Some economists and politicians have argued the tax hike could dent the success achieved so far under premier Shinzo Abe through aggressive monetary easing and big fiscal spending.
But the BOJ has repeatedly said the economy can ride out the sales tax hike without additional monetary support.
Many analysts agree with the central bank's view that economic growth will rebound in July-September after an expected contraction in the second quarter, as the tax hike effect eases.
Nakaso, however, acknowledged that exports continued to disappoint with the pace of recovery remaining sluggish due largely to soft demand in emerging Asian markets.
He cited structural factors that may have weighed on exports, such as weak global capital expenditure and the lingering effect of a prolonged period of yen strengthening that pushed many Japanese companies to shift production overseas.
Exports are expected to rebound moderately ahead as global business investment picks up, Nakaso said, though he added that developments in external demand warranted close attention "without undue optimism." Nakaso, one of the BOJ's two deputy governors, has toed the central bank's official line on monetary policy and the economy.
reuters.com
But he voiced caution over sluggish exports and stressed that it was premature to debate an exit strategy for the BOJ's massive stimulus programme, signalling the central bank's resolve to keep pumping money aggressively to accelerate inflation toward its 2 percent target.
"The conquest of deflation in Japan is now in sight. We are, however, only halfway toward achieving the price stability target of 2 percent," Nakaso said in a speech to business leaders in Shizuoka, eastern Japan, on Wednesday.
The former career central banker is the only member within the current BOJ board who was involved in the central bank's exit from its previous five-year quantitative easing in 2006.
The BOJ cannot use the same strategy it used back in 2006 to end the current stimulus -- dubbed "quantitative and quantitative easing" (QQE) -- as its balance sheet is bigger and is loaded with debt with longer durations, Nakaso said.
"But we already have various tools to withdraw liquidity," he said, adding that how to use these tools and in what order would depend on economic and price conditions at the time.
The BOJ has left policy unchanged since unleashing an intense burst of stimulus in April last year, when it pledged to pull Japan out of chronic deflation and push up consumer price inflation to 2 percent in roughly two years.
Core consumer inflation has gradually accelerated since then, hitting 1.4 percent in the year to May when excluding the effect of a sales tax hike in April.
The BOJ has said inflation will slow in coming months due largely to the base effect of last year's spike in energy costs, before accelerating again toward its 2 percent target.
Many market participants doubt prices will rise that much and some have speculated that if the inflation rate dips below 1 percent in coming months, the BOJ could be forced into easing policy further to ensure the target is met.
Some analysts, however, warn that if inflation accelerates toward 2 percent as the BOJ projects, that may heighten speculation the central bank will taper its asset purchases.
Nakaso warned markets against focusing too much on monthly price moves, stressing that what was more important was that the mechanism for pushing up prices was falling in place, such as a narrowing output gap and heightening inflation expectations.
He also said the decline in household spending after the sales tax increase had been within expectations, in line with the central bank's baseline scenario that the economy continued to recover moderately mainly on robust domestic demand.
The comments came after a recent slew of weak data cast doubt on the BOJ's scenario of an investment-driven economic recovery. Household spending and machinery orders, a leading indicator of capital spending, both tumbled in May, underscoring the fragile state of the recovery.
EXPORTS DISAPPOINT
Japan's economy clocked its fastest pace of growth in more than two years in the first quarter as consumer spending jumped and business investment turned surprisingly strong ahead of a sales tax hike in April to 8 percent from 5 percent.
Some economists and politicians have argued the tax hike could dent the success achieved so far under premier Shinzo Abe through aggressive monetary easing and big fiscal spending.
But the BOJ has repeatedly said the economy can ride out the sales tax hike without additional monetary support.
Many analysts agree with the central bank's view that economic growth will rebound in July-September after an expected contraction in the second quarter, as the tax hike effect eases.
Nakaso, however, acknowledged that exports continued to disappoint with the pace of recovery remaining sluggish due largely to soft demand in emerging Asian markets.
He cited structural factors that may have weighed on exports, such as weak global capital expenditure and the lingering effect of a prolonged period of yen strengthening that pushed many Japanese companies to shift production overseas.
Exports are expected to rebound moderately ahead as global business investment picks up, Nakaso said, though he added that developments in external demand warranted close attention "without undue optimism." Nakaso, one of the BOJ's two deputy governors, has toed the central bank's official line on monetary policy and the economy.
reuters.com
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