Japan economics minister warns of premature QE exit, sees room for more easing

Japanese Economics Minister Akira Amari warned that it would be premature for the Bank of Japan to consider an exit strategy from its massive stimulus programme, voicing hope instead for further monetary easing if achievement of its inflation goal falls behind schedule.
Amari also said that while Japan appears to be emerging from years of persistent price declines, it was too early to formally declare a sustained end to deflation with the economic recovery still vulnerable to external shocks.
"The BOJ has expressed strong determination that it won't hesitate to take further action if (the timing for meeting the inflation target) is not on schedule," Amari said in an interview at a Reuters Newsmaker event on Friday.
"If the BOJ judges that it's not on schedule, I think the central bank will decide on its own (to act)," he said.
The central bank has kept policy unchanged since deploying an intense burst of monetary stimulus in April last year, when it pledged to double base money via aggressive asset purchases to accelerate inflation to 2 per cent in roughly two years.
With Japan only halfway to meeting that target, the BOJ is set to keep its stimulus plan intact well into next year, in contrast to its U.S. and British counterparts, which are starting to telegraph plans for interest rate hikes.
But BOJ officials have become more comfortable speaking about the chance of a future exit from quantitative easing (QE). They have also shown no intention of expanding stimulus any time soon on their conviction that Japan is making steady progress in meeting the price goal.
Amari said Japan was no longer suffering from price declines, with inflation steadily accelerating. But he warned against complacency, saying he wanted more evidence that the economic recovery was strong enough to sustainably push up prices.
"The BOJ is striving to achieve 2 per cent inflation in roughly two years. We can't declare that deflation has been eradicated unless inflation stays at that level and there are assurances it won't ease (back to deflation), even if the economy is hit by some external shocks," he said.
Core consumer inflation hit 1.4 per cent in the year to May, excluding the effect of an April 1 sales tax hike. The BOJ expects inflation to slow to near 1 per cent in coming months as the boost from a weak yen fades, before accelerating toward 2 per cent through early next year.
Many private economists still expect the BOJ's next move to be an expansion of, not an exit from, stimulus, as they doubt the price goal can be met within the bank's target timeframe.
With BOJ Governor Haruhiko Kuroda repeatedly voicing confidence of meeting the price goal, however, most analysts expect the bank to hold off on further easing at least until October.
Japan's economy has shown signs of revival since Prime Minister Shinzo Abe took office 19 months ago, pledging to end deflation and generate sustainable growth with a triple-pronged strategy he called his "Three Arrows."
The first two arrows of massive fiscal and monetary stimulus have helped lift stock prices and weaken the yen, brightening business sentiment and boosting exporters' revenues.
Amari was charged with crafting the third arrow measures to boost Japan's growth potential, the latest of which was unveiled last month and included steps such as phased-in corporate tax cuts to lure more overseas companies into investing in Japan.
In the interview, he laid out details of his plan to cut the corporate tax rate - among the highest in the world at above 35 per cent - to less than 30 per cent over several years.
From next fiscal year starting in April, the government is aiming to cut the corporate tax rate by about 6 percentage points over five years, which could turn out to be a 1.1 or 1.2 percentage point cut each year, he said.
Policymakers hope that such steps would put the economy on a sustained recovery, and encourage companies to boost wages and capital expenditure instead of sitting on huge piles of cash.
Recent data, however, has cast doubt on whether capital expenditure will increase enough to act as a driver of growth.
The BOJ's "tankan" survey showed companies are planning solid rises in capital spending. But machinery orders tumbled by a record margin in May, fueling doubt about whether firms would actually implement their upbeat spending plans.
Amari was unfazed by the weak machinery orders data, saying that the economy was set to continue recovering steadily after experiencing some speed bumps caused by the April tax hike.
David Wise writes frequently about intelligence and espionage. His most recent book is "Tiger Trap: America's Secret Spy War with China." His other books include "Spy: The Inside Story of How the FBI's Robert Hanssen Betrayed America."