The Japan government’s choice to lead the country’s central bank promised on Monday to move quickly to implement fresh monetary stimulus to lift the struggling economy, a case underlined by a surprisingly sharp drop in a gauge of capital investment.
Declaring that “speed is important ”, Haruhiko Kuroda said he would do whatever it takes to hit the Bank of Japan’s inflation target of 2 per cent – even though the economy has rarely seen that level of inflation since the early 1990s.
“I want to debate policy steps with the monetary policy committee and implement these steps as soon as possible,” he told lawmakers in an upper house confirmation hearing.
Kuroda is expected to be approved by parliament later this week because opposition parties, whose support is needed in the upper house, have indicated they would back him.
Supporters of the more aggressive monetary policy advocated by Prime Minister Shinzo Abe can point to a 13.1-per-cent drop in core machinery orders in January from December as highlighting the need for urgent action.
Analysts and government officials suggested the much weaker than expected figures were a blip in a typically volatile data series, but they did show companies remained cautious in their spending plans. Analysts had expected a fall of just 2 per cent.
Japan has been in deflation for most of the past two decades and figures last week showed that the economy edged out of its fourth recession since 2000 in the last quarter of 2012.
Critical of the BOJ’s gradual easing steps under outgoing chief Masaaki Shirakawa, Abe last month nominated Kuroda to replace him. Kuroda has advocated bolder and swifter action such as buying more risk assets and more and longer-dated government debt, points he repeated to the upper house.
“We’re in an environment where there is limited room to lower interest rates further,” Kuroda said. “That’s why it is important to try to influence market expectations.”
If approved by parliament, Kuroda would step down next week as president of the Manila-based Asian Development Bank and take over the BOJ after Shirakawa’s term ends on March 19. The BOJ’s next policy meeting is due on April 3-4, with financial markets expecting firm action.
“The next BOJ meeting under Mr Kuroda will ease monetary policy, which probably should be an aggressive one,” said Akito Fukunaga, chief rates strategist at Royal Bank of Scotland in Tokyo.
Kuroda and the BOJ nine-person board in general favour more monetary stimulus, but members have differing views on how best to revive and sustain economic growth, a gap on show on Monday.
While Kuroda told parliament fiscal policy had its role alongside monetary policy in supporting economic growth, he has insisted the BOJ had sufficient monetary tools to accomplish its inflation goal within two years.
However, Koji Ishida, a member of the BOJ board, said government and corporate efforts were necessary alongside monetary easing to defeat deflation and hit the BOJ target.
“Two per cent inflation is a very high level to aim for given Japan’s historical price moves,” he told a business audience in Utsunomiya, a city 100 kilometres north of Tokyo.
“But there’s a good chance this level will be in sight if the BOJ’s powerful monetary easing is accompanied by progress in boosting Japan’s competitiveness and growth potential,” Ishida said.
The sharp drop in seasonally adjusted core machinery orders in January followed three months of solid increases.
The Cabinet Office said the orders, considered a leading indicator of corporate capital spending, overall were “showing signs of moderately picking up.”
It blamed the sharp drop on declines in big-ticket items such as turbines and boilers and forecast they would rise 0.8 per cent in the first quarter after a 2 per cent increase in the final quarter of 2012.
“The fall was bigger than expected but I would still say this is a temporary fall,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
“The yen’s weakness helps expectations for exports to pick up and business sentiment has also been improving,” he said.
Abe’s prescriptions of monetary and fiscal stimulus, dubbed Abenomics, have so far helped drive the yen to 3-1/2 year lows against the dollar, supporting exporters such as Toyota Motor Corp.
Japan’s financial markets were mostly focused on Monday on strong U.S. jobs data raising hopes for the outlook of the world’s biggest economy.
Abe has also nominated academic Kikuo Iwata, who supports unconventional monetary policy, and BOJ official Hiroshi Nakaso as deputy governors.
The nominations must be approved by both houses of parliament. Abe’s ruling camp controls the lower house but lacks a majority in the upper house.
Under current policy, the BOJ has agreed to buy assets or make loans totalling ¥101-trillion ($1.07-trillion U.S.) by the end of this year, which includes buying government bonds with a maturity of up to three years.
It said in January it would switch to open-ended asset buying from 2014 to achieve the 2 per cent inflation target. Kuroda said he would consider starting the open-ended policy earlier than scheduled.