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Outgoing Bank of Japan head warns no quick fix to deflation

Outgoing Bank of Japan Governor Masaaki Shirakawa leaves after his last news conference as head of the central bank, in Tokyo March 19, 2013. Shirakawa said on Tuesday central banks must respect communication with markets but in the end have to make monetary policy decisions that are most desirable for long term economic growth.


Outgoing Bank of Japan Governor Masaaki Shirakawa warned on Tuesday there is no quick way to fix an economy that has suffered 15 years of deflation and that aggressive money printing alone was not the answer.

His comments contrast with those of incoming Governor Haruhiko Kuroda, who argues the BOJ can achieve a 2 per cent inflation target in two years by pumping money more aggressively into the stagnant economy.

"A lack of cash isn't what's keeping companies from increasing capital expenditure," Shirakawa said, on the last day of his five-year term as governor and his 39-year career at the central bank.

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"If there was a single thing that would have cleared the fog and solved all problems, Japan wouldn't have been in this situation for 15 years," he said, shrugging off the view that monetary stimulus alone can revive the economy.

In his final news conference as BOJ chief, he repeated his long-held view that efforts to boost Japan's growth potential, such as deregulation and government action to boost a shrinking working population, must accompany ultra-loose monetary policy to finally defeat deflation.

Kuroda, Japan's former currency tsar who will take over on Wednesday, has said that the central bank can manage market and public expectatations of future price moves by aggressive policy easing and showing its resolve to beat deflation.

But Shirakawa warned that Japan's past experience and recent examples in the United States and Europe show there is no longer a clear link between the size of an economy's monetary base and inflation.

He was also doubtful whether central banks had the power to influence inflation expectations and cautioned against focusing too much on meeting market expectations for action.

The yen has slumped in recent months and stocks have jumped in anticipation of aggressive action from the central bank. Kuroda's first meeting in charge will be on April 3-4.

"What may be desirable for market participants may not necessarily be the same as what is desirable for the economy in the long run," Shirakawa said.

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"I feel it is dangerous to believe that central banks can freely control market moves with words," he said.

The 63-year-old leaves the BOJ after five years battling a series of market shocks, including the collapse of Lehman Brothers in 2008, the euro-zone debt crisis and the March 2011 earthquake in Japan.

He was credited with protecting Japan's banking system from the shocks with quick liquidity provision. Under Shirakawa, the BOJ took interest rates down to virtually zero and eased monetary policy 13 times, more than three times as often as his predecessor.

But he was criticised for failing to end deflation and for being too cautious about easing policy for fear of potential future drawbacks such as sowing the seeds of an economic bubble.

"Monetary policy requires both boldness and caution. It was a narrow path," Shirakawa said, reflecting on his five years at the helm.

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