BOJ's Iwata upbeat on economy, unfazed by post-tax hike slump

Wed Sep 10, 2014 2:44am EDT
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By Leika Kihara

KANAZAWA Japan (Reuters) - Bank of Japan Deputy Governor Kikuo Iwata on Wednesday reiterated policymakers' conviction that the economy can recover from a deep slump, saying that households and companies will boost spending as the pain from an April sales tax hike eases.

Iwata acknowledged that weak exports and the rising burden on households from the tax hike were among risks to the outlook, but said a pick-up in global demand and wages will keep the world's third-largest economy on track for a moderate recovery.

"The recovery in consumption has been patchy ... But taken together, it is gradually recovering. It's not as if household spending is headed for a deep dive," he told a news conference after meeting business leaders in Kanazawa, a city in Ishikawa prefecture in central Japan.

"We're on track to meeting our price target," he said, suggesting that he saw no need to expand monetary stimulus any time soon to ease the pain from the tax hike.

Japan's economy shrank an annualized 7.1 percent in April-June from the previous quarter, the biggest contraction since the global financial crisis in 2009, due to the hit from the sales tax hike in April. That has heightened doubts in markets that the BOJ can accelerate consumer inflation, now around 1.3 percent, toward its 2 percent target next year.

However, Iwata countered the view that wage rises have been slow despite the BOJ's massive monetary stimulus, saying that it takes time for companies - long used to deflation and hesitant to increase wages - to consider raising base salary.

He also disagreed with many analysts that consumer inflation will slow as the boost from the weak yen begins to fade, saying that there was no strong historical co-relation between the yen and price moves.

A weak yen may briefly push up prices by boosting import costs but that alone cannot accelerate inflation in the long run as households, hit by higher prices of imported goods, will withhold spending on other items, Iwata said. As demand weakens for these goods, firms will be forced to cut prices, he added.   Continued...

Bank of Japan's (BOJ) Deputy Governor Kikuo Iwata poses for a photo after an interview with Reuters at the BOJ headquarters in Tokyo June 24, 2013.  REUTERS/Toru Hanai