Thursday, September 5, 2013
DJ: BOJ's Kuroda Ratchets Up Pressure On Prime Minister To Raise Sales Tax
TOKYO--Bank of Japan Gov. Haruhiko Kuroda urged the government to proceed with a sales tax hike in April, expressing confidence that the economy is now strong enough to withstand its impact, while warning that the consequences of delaying the move could be grave.
Mr. Kuroda's remarks come after the BOJ's nine-member policy board proclaimed Thursday that the world's third-biggest economy is back on a recovery track, a move that gives more ammunition for those pressing the government to go ahead with the tax increase as Prime Minister Shinzo Abe nears a final decision on the matter.
"If market trust in Japan's fiscal management is undermined, causing Japanese government bond prices to drop, that will be difficult to counter through monetary policy," Mr. Kuroda said after a two-day meeting of the central bank's board.
The board left monetary policy unchanged, as had been widely expected, sticking to a plan to double the amount of money the bank pumps into the economy as it seeks to hit a 2% inflation target in two years.
Mr. Kuroda's comments reflect a deep sense of concern within the central bank that while it has the policy tools to counter a possible economic slowdown caused by the tax increase, there will be little it can do should a change in the tax plan result in a loss of confidence in Japan's commitment to pay down its debt.
In such a scenario, government bond prices are likely to fall, causing a spike in interest rates across the board. That could choke off borrowing by consumers and businesses and thus overall growth.
The BOJ may be expected to increase its buying of bonds to support their prices and push down rates as it does now under its radical easing program. But once investors start doubting the government's willingness to meet its debt obligation, such purchases could backfire, leading to the view that the BOJ is merely financing government spending, a recipe for high inflation and interest rates. The bank is already buying 70% of newly issued Japanese government bonds.
Mr. Kuroda said the government's hands would be tied as well, because more borrowing and spending would only push yields higher.
The current plan for raising the sales tax stipulates that the government will increase the 5% rate to 8% next April and to 10% in October 2015 provided the economy is on an "upturn." Mr. Abe is expected to make a decision on the matter by early next month.
In a statement issued after Thursday's policy decision, the BOJ's board said Japan's economy "is recovering moderately." The tone of the language is the strongest since March 2008--half a year before the global financial crisis hit its peak--when the central bank described the economy as "expanding moderately." The assessment will provide fuel for calls to press ahead with the planned tax hike.
But opponents of the plan are worried about the direct impact a tax hike could have on growth. In addressing such concerns, Mr. Kuroda made it clear that the BOJ is ready to prop up the economy through fresh stimulus steps should the tax increase cause growth to weaken sharply, making it harder to meet the central bank's inflation goal.
If the tax hike hits Japan's economy hard and if that "makes it difficult for us to achieve our price stability target, we will take necessary measures in response," Mr. Kuroda said.
Mr. Kuroda didn't say what steps he has in mind, but in the market, speculation is already rife that the BOJ would increase its buying of risk assets, such as exchange-traded equity funds.
Still, some of the prime minister's closest economic advisers are calling on the government to delay the start of the tax hikes by a year or for smaller incremental increases to help the economy maintain its nascent momentum toward shaking off 15 years of deflation.
Mr. Kuroda seems to think that would be a mistake.
"If you give up on what you have previously decided and say you will move ahead with something different, I am not sure the market will place 100% confidence in any new plan," Mr. Kuroda said.