Tags: Japan | Central | Bank | Markets

Japan Central Bank Chief: No Worries about Financial Markets

Sunday, 26 May 2013 12:00 PM

Bank of Japan Governor Haruhiko Kuroda backed "bullish" views on asset markets and said the nation could cope with rising interest rates after a one-day slump in the stock market last week and volatility in bonds.

There are no signs that investors have "excessively bullish expectations," the 68-year-old Kuroda said in Tokyo Sunday. He cited an April BOJ report that indicated rates could rise by between one and three percentage points in an improving economy without financial instability. Ten-year government bond yields touched 1 percent last week, more than triple a record low on April 5.

Market volatility threatens to sap confidence in the campaign by Kuroda and Prime Minister Shinzo Abe to jolt the world's third-biggest economy out of a 15-year deflationary malaise. Policy makers need to sustain momentum after growth accelerated to the fastest pace in a year in the first quarter and the Topix Index rose 39 percent this year, a gain limited by a 6.9 percent plunge on May 23 that was the biggest since the 2011 earthquake and tsunami.

Kuroda "wants to send a green light to those who are bullish on Japan's markets and economy," said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo and a former central bank official. "There's no way he will throw cold water by showing his concern at a time when there are signs of positive developments" in the economy, Adachi said.

Financial Stability

Kuroda was speaking to the Japan Society of Monetary Economics at Hitotsubashi University, where he was once a professor, two months after taking over as BOJ governor with a pledge to do whatever it takes to defeat deflation. On April 4, he unveiled a plan to double money in the economy over two years by ramping up bond purchases, chasing a target of 2 percent inflation.

There’s "no sign at this point of excessively bullish expectations in asset markets or in the activities of financial institutions," Kuroda said. He also restated that, while central bank asset purchases are intended to drag yields down, the reverse may happen in an improving economy.

The central banker cited an April report on the impact of rising rates on the financial system that indicated that an increase of between one and three percentage points would be manageable, as improving lending margins and rising stocks would offset some of the negative effects.

Japan's Burden

Kuroda also referred to the risk of yields rising because of concern over the sustainability of Japan's debt, which the International Monetary Fund estimates could reach as much as 245 percent of gross domestic product this year, and urged the government to make progress on fiscal measures.

Population aging, inflexibility in labor laws and a swelling bill for energy imports because of nuclear power shutdowns are drags on the economy. While the yen weakened about 19 percent against the dollar in the past six months, aiding exporters such as Toyota Motor Corp., Japan's economic experiment is yet to pump up business investment or wages.

Paul Krugman, a 2008 Nobel laureate in economics, said last week that the one-day stock slump didn’t alter his assessment that Abe's policies are showing signs of working and could serve as an example for the world.

"For if Abenomics works, it will serve a dual purpose, giving Japan itself a much-needed boost and the rest of us an even more-needed antidote to policy lethargy," Krugman wrote in the New York Times on May 24.

Global Challenges

Around the globe, governments are grappling with supporting growth while strengthening public finances or undertaking economic restructuring. As U.S. Federal Reserve policy makers debate paring quantitative easing and austerity measures trigger protests in the 17-nation euro area, China's Premier Li Keqiang says he wants to find new growth drivers by cutting the state's role in the economy.

In Japan, Abe and Kuroda want to fuel prices, wages and growth without triggering a jump in debt-servicing costs that makes the nation’s debt burden unsustainable. In December, Abe led his Liberal Democratic Party to victory in elections by pledging to fire "three arrows" to end stagnation: monetary stimulus, fiscal spending and cutting regulation to increase investment and hiring. He faces a July election in the upper house of parliament, where the LDP is currently in a minority.

Unprecedented Stimulus

While Kuroda is learning the ropes as central bank governor, he has previously been in charge of market-moving policies as the nation's top currency official. He was Asian Development Bank president from 2005 until his move to the BOJ.

He said Sunday that the economy is clearly picking up, after saying last week that the unprecedented stimulus announced by the central bank is sufficient and that the mechanics of bond-buying operations may be adjusted if necessary to limit market volatility.

Yields on benchmark 10-year government securities climbed about 23 basis points in the two weeks through May 17, the biggest such advance since May 2008, according to data compiled by Bloomberg.

On May 23, the 17 1/2 basis-point gap between the day's highest and lowest rates for the debt was the widest since April 5, the day after Kuroda announced record easing. The central bank is set to soak up the equivalent of 70 percent of the debt sold by the government each month.

Gross domestic product rose an annualized 3.5 percent in the first quarter as consumer spending and export gains outweighed the weakest business investment since the wake of the March 2011 earthquake and tsunami. Private consumption, making up 60 percent of GDP, contributed 2.3 percentage points to the jump.

Kuroda said Sunday that Japan is expected to return to a moderate recovery path around the middle of the year, backed by domestic demand and a pickup in the global economy.

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Bank of Japan Governor Haruhiko Kuroda backed bullish views on asset markets and said the nation could cope with rising interest rates after a one-day slump in the stock market last week and volatility in bonds.
Sunday, 26 May 2013 12:00 PM
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