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Bank of Japan head tries to allay fears of a rate increase

Japan's central bank chief yesterday renewed his pledge to fight deflation despite emerging signs that the current economic recovery is slowly spreading to laggard sectors.

In prepared testimony to a parliamentary committee, Bank of Japan (BoJ) Governor Toshihiko Fukui repeated the central bank would maintain its super-loose monetary policy until deflation disappears completely in Japan.

His comments came amid speculation that the central bank may shift its existing accommodative policy to neutral after a string of economic data pointed to a steady economic recovery, led by booming exports to Asia.

Fukui said the central bank would not change its monetary policy until the core consumer price index, which excludes volatile fresh food prices, shows at least low inflation for a sustained period and is unlikely to fall back.

"As we have said earlier, even if such conditions are met, we may see it as appropriate to maintain the current policy stance, depending on economic and price developments," Fukui said.

"I believe a clear promise by the Bank of Japan like this is making a great contribution to the formation of stable interest rates in the financial markets," he said.

Fukui has been trying to quell speculation about a policy shift in the money markets which tend to factor in what is likely to happen in the months ahead, so prompting an unwelcome rise in long-term interest rates for many businesses and households.

Fukui stuck to the bank's forecast released last October that deflation is expected to persist until March next year as the supply-demand gap is likely to shrink only slightly.

That is, when workers who have suffered pay cuts and layoffs would actually feel the trickle-down effect in terms of incomes of the current recovery that is so far mainly benefiting large-scale manufacturers, economists said.

"The Japanese economy has taken off from 13 years of stagnation but is still flying low," said Susumu Takahashi, senior economist at Japan Research Institute.

"The shift of wealth to corporations that took place after the bursting of the economic bubble of the 1980s will gradually return to households in one to two years' time if the recovery progresses without a hitch," he said.

A gap in perception exists between the government, which claims the economy has turned upward, and consumers, the majority of whom are still unhappy with the level of economic activity, Takahashi noted.

That was borne out by a survey published by the Yomiuri Shimbun daily yesterday showing that 84 percent of the 1,823 respondents in a poll of 3,000 people said they could see little or no sign of an upturn despite recent positive data.
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