WASHINGTON (Reuters) – Central Bank Governor Haruhiko Kuroda of the Bank of Japan said on Sunday that a mix of financial relief, flexible financial spending and structural reforms to boost the country's long-term growth potential can be effective in stimulating the economy.
Bank of Japan (BOJ) Governor Haruhiko Kuroda, speaking during an interview with Reuters in Washington, USA October 19, 2019. REUTERS / Carlos Jasso
Kuroda said central banks in advanced nations still have sufficient tools to boost growth , counteract the view that years of low growth and low inflation have given them little ammunition to fight an economic downturn.
But he said that tax expenditures and structural reforms to boost the potential growth of an economy will help increase the effect of monetary policy relief.
"We are equipped with unconventional toolkits, so there is no need to be too pessimistic about the effectiveness of monetary policy," Kuroda told a seminar on long-term policy challenges for central banks.
"By responding to significant downward pressure (on growth), a political mix of monetary easing, flexible fiscal policy and steps to raise the natural interest rate could be effective."
The comments came after the growing fallout from the bitter US-China trade war forced the International Monetary Fund to cut global growth, and put pressure on central banks to do more to avert increased global risk.
BOJ has signaled the chance of easing as early as this month as weak global demand hurt Japan's export-support economy.
Kuroda said that while the BOJ will maintain its huge stimulus program to achieve its inflation target of 2%, it must also take steps to reduce the cost of long-term relief.
“The stability of the financial system should mainly be addressed through macro-prudential steps. But no precautionary toolkit is perfect, ”Kuroda said.
“Monetary policy affects broad areas of financial activity. The BOJ should investigate economic performance and provide appropriate policy answers to reduce the cost of monetary relief. "
Kuroda said that BOJ saw the need to" take into account the shape of the yield curve, "as excessive falls in super-long bond yields would flatten the curve and erode the return pension funds and insurance companies earn on their investments.
Japan has not yet encountered a situation where ultra-low interest rates damage the financial institutions' profits enough to discourage them from lending, he said.
But such negative effects of long-term relief are cumulative and must therefore be closely monitored, he added.
"It's not a serious problem now. But in five or ten years it can be a serious problem, ”he said, adding that BOJ is likely to follow up with any additional financial relief steps with measures to mitigate the side effects.
Muted inflation has forced the BOJ to maintain ultra-low rates for years, hurting the financial institutions' profits and providing them with fewer tools to combat the next recession.
Under a policy called yield curve control (YCC), the BOJ commits to direct short-term interest rates to -0.1% and the 10-year government bond rate around 0%.
Reporting by Leika Kihara; Editing by Lisa Shumaker