Bank of Japan Governor Haruhiko Kuroda warned that escalating tensions in North Korea were among risks to an otherwise brightening global economic outlook, stressing that the central bank was closely watching the impact on markets and Japan’s economy. Kuroda also defended the BOJ’s 2 percent inflation target, considered by many analysts as too ambitious, saying the bank can help keep long-term currency moves stable by setting its price goal at a level equivalent to other central banks. “Our main scenario is for global growth to accelerate moderately. But we’ll continue to closely watch how developments in North Korea could affect markets and Japan’s economy,” Kuroda said in a meeting with business leaders in Osaka, western Japan, on Monday.
“The BOJ is ready to take appropriate action as needed,” he said without elaborating on specific measures. As with other central banks, the BOJ’s first line of defense against major economic and market shocks would be to offer unlimited amounts of liquidity via market operations. Japan’s economy expanded at an annualised rate of 2.5 percent in April-June, marking the longest streak of expansion in 11 years, on robust exports and a pick-up in consumption. But inflation has hovered around 0.5 percent, well below the BOJ’s 2 percent target, as companies remain wary of raising prices for fear of scaring away cost-sensitive households. Kuroda said it was “unrealistic” to bring up Japan’s inflation target to around 3 or 4 percent, an idea floated by some US academics as a way to heighten inflation expectations.
But he said the BOJ should maintain its 2 percent target, a level deemed a global standard, to keep the yen’s moves stable against other currencies. “Foreign exchange rates fluctuate due to various factors in the short run. But their moves reflect inflation differentials between countries in the long run,” Kuroda said. Kuroda also said there was a shared agreement among Group of 20 major economies that currency rates ought to move stably, reflecting economic fundamentals. Kuroda praised Japanese companies for making various efforts, such as streamlining operations through automation, to cope with a tightening job market that was pushing up labour costs.
But he said there were limits to how much businesses can absorb rising labour costs without increasing wages and prices. “There appears to be some signs of change in companies’ price-setting behaviour,” he said. While such changes are not broad-based yet, it could spread across Japan if the economy continues to expand and make households more accepting of price hikes, he said.