Kuroda Sees Limited Impact of Market Turmoil on Japan's Outlookby and
Says world not in a Lehman redux, China to avoid hard landing
Many ways to ease if needed; BOJ only holds one-third of bonds
Bank of Japan Governor Haruhiko Kuroda played down the prospect of market turmoil causing Japanese companies to pare back capital spending and wage increases, and expressed confidence in the underlying pace of inflation a week before he decides on monetary policy.
"At this stage, we don’t think the current market situation has been affecting corporate behavior unduly," Kuroda said in an interview with Bloomberg in Davos, Switzerland, on Friday. "But, as I said, the market is the market, and markets could affect the real economy -- so we carefully watch."
Kuroda, 71, was speaking ahead of one of the thorniest policy meetings since he took the helm of the BOJ almost three years ago. Waning inflation expectations, sliding oil prices and a reversal in the yen’s declines have put pressure on the BOJ to expand an already-record stimulus program. Yet with concerns about China dominating the focus of financial markets, the danger is that further action by Japan may have limited impact.
The BOJ governor said that he didn’t think China faced the risk of a hard landing, that he was "relatively optimistic" about its prospects, and that there is no sort of global crisis like the post-Lehman Brothers meltdown. If market ructions were prolonged, it would affect the economy, he said. He reiterated that there are many ways to strengthen the BOJ’s easing program if needed.
"The economic situation seems to be okay in Japan. The question is whether the recent turmoil in the market will affect corporate behavior or consumer behavior -- that’s the very uncertain point," said Tomo Kinoshita, chief economist of Nomura Securities Co. in Tokyo. "If the BOJ feels that this downside risk is likely to intensify, they could make a preemptive move."
Speaking later during a panel discussion in Davos on Saturday, Kuroda said the turmoil in markets has been greater than anticipated. He also noted that he didn’t share the pessimism seen in markets about the outlook for the global economy.
Key data on Japan’s economy due for release before the Jan. 29 policy announcement may influence the outcome of the decision. The industrial output report that same morning may be particularly important, along with a survey of production plans for January, said Kinoshita, who currently predicts the BOJ will hold off on added stimulus until April.
“At this stage, a virtuous cycle of income to spending by the corporate sector as well as the household sector is maintained -- fairly robust,” Kuroda said in the interview. “We are not so much concerned about the real economy.”
Failing to act could have a cost: Japanese stocks jumped on Friday in part amid hopes of expanded stimulus, creating the potential for disappointment. Fellow Davos participants in recent days have given signals of support for markets, with the vice president of China saying his government will "look after" stock investors, and the European Central Bank chief signaling before his arrival that he may ramp up easing as soon as March.
Divergent policies reflect the differences in economies, Kuroda said in the panel discussion, adding that central banks could hurt the economy if they all exited their programs together.
Excluding the impact of oil prices, Kuroda estimates that inflation is running around 1 percent to 1.5 percent in Japan, the U.S. and Europe. Japan and others maintain a 2 percent inflation target. "Of course, a prolonged oil-price decline or prolonged financial turmoil could affect even future inflation expectations in Japan -- at this stage, not much."
A rising yen risks undoing one of the most important achievements of Kuroda and the government’s Abenomics program: a weaker yen that buoys Japanese exporters. Profits at many large manufacturers have surged with the yen’s near-30 percent drop since Prime Minister Shinzo Abe came to office three years ago.
“Kuroda really doesn’t want to see optimism for corporate profits vanish because of the currency,” said Masaaki Kanno, Japan chief economist at JPMorgan Chase & Co. and former BOJ official. “He’s been urging companies to use the record cash they’ve accumulated thanks to the yen and low oil prices.”
Kuroda is a veteran communicator with financial markets, having served as the Finance Ministry’s top official on the yen a decade and a half ago, when it would sometimes intervene in the currency market. At the central bank, he has also shown a tendency to surprise investors and BOJ watchers -- in the scale of his original asset-purchase program in April 2013, and in an unexpected expansion of the initiative in October 2014.
"Surprise is a very important element of the BOJ’s policy" under Kuroda, said Kinoshita.
While Japanese stocks rose Friday, the Topix index is still down almost 19 percent since a peak last August. The yen has advanced against the dollar this year, while almost every other major currency has fallen.
Kuroda has held off bolstering stimulus even as the bank repeatedly postponed the timing of reaching its 2 percent inflation target, making it difficult to predict how much he could be swayed by the present situation. People familiar with talks inside the bank told Bloomberg earlier this week that officials are considering a third postponement in reaching the target in less than a year, at next week’s meeting.
The officials are also increasingly expressing disappointment at subdued annual wage talks as labor unions seek smaller gains than a year ago, according to the people.
Toyota Motor Corp. is forecasting record profits for the year ending in March. By contrast, the umbrella labor group representing its workers said it is cutting in half the minimum increase it’s seeking for next fiscal year compared with the talks this year.
“If necessary to achieve the 2 percent inflation target, particularly if the underlying inflation trend is seriously affected, then we can expand or further strengthen QQE in many ways,” Kuroda said, referring to his quantitative and qualitative easing program. “There are many ways to further strengthen and expand QQE even more creatively.”
Kuroda noted that there are many different types of assets available in Japan, while government bonds are the biggest and most liquid market. He said that the BOJ currently holds about one third of that market, still leaving two thirds untouched.
“The BOJ is presently running a marathon with no goal in sight,” Kentaro Koyama, a Japan economist at Deutsche Bank AG, wrote in a report on Jan. 19. “It also faces the hurdle of a relentless downturn in oil prices. If it fails to pace itself properly, it could fall out of the race long before the end. We suspect that the BOJ’s strategy will be to conserve its energy until needed for the final burst.’’
Kuroda became the first BOJ governor to attend the World Economic Forum in 2014, and this year marks his third straight visit. He arrived days after the International Monetary Fund estimated that Japan’s economy grew 0.6 percent last year, the slowest pace among Group of Seven nations. The IMF projected Japan to grow 1 percent in 2016, also the slowest in the group.
Kuroda, who served as head of Asian Development Bank before being handpicked by Abe to run the central bank, still has two years left in his term at the BOJ. He said that “I’m always cautiously optimistic.”
“The next year would be much better -- or at least better.”