May 10, 2018 / 3:31 AM / 2 months ago

BOJ governor signals debate on conditions for stimulus exit

TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda said the central bank could debate conditions for exiting from ultra-easy policy if prospects for achieving its inflation target improve, reminding markets his radical stimulus program won’t last forever.

Bank of Japan Governor Haruhiko Kuroda attends a news conference in Tokyo, Japan, April 9, 2018. REUTERS/Kim Kyung-Hoon

But he refrained from dropping hints on the timing of an exit and warned that it could take more time than expected to drive up inflation, suggesting the BOJ was in no rush to follow in the footsteps of its U.S. peer in dialing back stimulus.

“When the possibility of achieving our price target heightens, conditions for an exit would fall into place,” Kuroda told a seminar on Thursday.

“The BOJ’s policy board could then discuss conditions for an exit,” he said, giving the strongest signal yet on the chances of beginning a debate over how to end the bank’s crisis-mode policies.

A summary of the BOJ’s rate review in April showed on Friday the bank was working to prepare markets for a future withdrawal of its stimulus, with some policymakers calling for more scrutiny of the rising cost of prolonged easing.

In a speech delivered at the seminar, Kuroda pointed to risks that could delay achievement of its price target, such as the chance inflation expectations may not increase smoothly.

With the economy in good shape and the labor market tightening, the key to achieving 2 percent inflation was to change public perceptions that prices won’t rise much, he said.

“If there is strong uncertainty about future growth, firms will hesitate to raise wages,” he said. “We need to keep in mind that it might take a fair amount of time” before actual rises in prices heighten inflation expectations.”

The remarks, which came in the wake of the BOJ’s decision last month to drop any timeframe for meeting its price goal, underscore its waning conviction its stimulus program would boost inflation expectations - key to meeting its price goal.

Kuroda rejected views the cost of easing exceeded its merits, saying he did not see the BOJ’s policy nearing a limit.

Once inflation expectations heighten, the stimulative effect of the current policy will increase as real interest rates, or inflation-adjusted borrowing costs, will fall, Kuroda said.

“When assessing the extent to which interest rates stimulate economic activity and prices, it’s essential to consider the level of real interest rates,” he said.

Reporting by Leika Kihara; Editing by Simon Cameron-Moore & Sam Holmes

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