Published January 31, 2013
NAGASAKI/TOKYO – A Bank of Japan deputy governor has flagged the strongest signal yet that it will boldly implement more stimulus if needed to achieve the bank's new 2 percent inflation target.
Deputy Governor Hirohide Yamaguchi shrugged off global criticisms that the central bank was intentionally weakening the yen by monetary easing, stressing that it never deliberately targets exchange rates.
"I won't rule out the chance of our easing indirectly affecting currency moves and weakening the yen. But we don't take policy steps for the purpose of directly affecting exchange rates," he told a news conference after meeting business executives in Nagasaki, southern Japan, on Thursday.
His remarks came after Prime Minister Shinzo Abe waded into the growing global debate about currency wars, saying Japan's fiscal and monetary stimulus measures are aimed at beating deflation, not at manipulating currency movements.
Abe's pledge of bold fiscal and monetary stimulus has helped push down the yen, supporting the export-reliant economy and nudging Japan's Nikkei share average to a 33-month high.
Yamaguchi, one of the central bank's two deputy governors whose terms expire in March, offered an upbeat outlook for Japan's economy, saying it is likely to start a moderate recovery around mid-year, following strong signals from the United States and China.
Factory output in December rose at the fastest pace in a year and a half and firms expect further gains, data showed on Thursday, raising hopes that a recovery may be already underway.
Policymakers will welcome an improvement in the economy, but the bank will likely stay biased toward further easing as Abe and some of his party's legislators keep up the pressure on the central bank with threats to revise the law guaranteeing its monetary policy independence.
NOT OFF THE HOOK
The bank this month doubled its inflation target to 2 percent and switched to an open-ended commitment to buying assets next year, responding to intense pressure from Abe for bolder efforts to beat deflation.
Yamaguchi said the open-ended commitment shows the bank's resolve to maintain its ultra-easy monetary policy without interruption, suggesting that further monetary stimulus will be primarily through buying more financial assets, rather than periodically resetting policy rates.
Yamaguchi said consumer inflation may reach 1 percent in the year ending in March 2015 if the economy picks up as projected.
"Now is a good chance for Japan to end deflation," Yamaguchi said. "We shouldn't miss this window of opportunity."
But many market players see politics as a more defining factor in when and how frequently the bank will act, and are already looking to a potentially new central bank leadership for clues to how willing it will be to adopt unorthodox policy measures.
With little room to cut already-low rates, the bank in 2010 put in place an asset-buying and lending program as its key monetary easing tool. Under the scheme, it has pledged to pump 101 trillion yen ($1.11 trillion) to markets by the end of this year and switch to open-ended asset purchases from next year.
The bank next meets for a rate review on February 13-14.
Japan's factory output rose 2.5 percent in December, below a median market forecast for a 4.5 percent gain. But manufacturers surveyed by the government expect output to increase 2.6 percent in January and rise 2.3 percent in February, indicating a moderate recovery in coming months.
Still, a sustained end to deflation remains distant. Wage earners' total cash earnings fell 1.4 percent in December from a year earlier, taking average monthly earnings in 2012 to a record low, as companies looked to cut costs.
($1 = 91.0650 Japanese yen)
(Writing by Stanley White and Leika Kihara; Editing by Eric Meijer and Robert Birsel)