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BOJ governor Kuroda confident Japan is on track to overcome deflation

FXStreet (Mumbai) - Bank of Japan governor Haruhiko Kuroda while speaking to business leaders today mentioned that an increase in fixed investment and wages will benefit Japan's economy as well as the companies. In his effort to put the economy back on the recovery path, Kuroda urged companies to step up investment, "given that Japan's economy is on the road to overcoming deflation and entering a new phase in which the economy will grow in a sustainable manner under price stability with 2% inflation."

Kuroda stresses on the need to increase wages

Only when companies increase spending wage growth can be raised. The central bank considers pick up in wages to be one of the most significant factors that can fuel its goal of achieving its 2% inflation target. He said. "The bank considers it desirable to achieve a situation in which both prices and wages rise in a balanced manner. He has however clarified that the bank will not adjust its policies aimed at achieving inflation target “simply in response to the pace of increase in wages."

Kuroda is of the opinion that there already exists an environment for wage increases. To prompt the companies to act now he said those companies which continue to be guided by a deflationary mindset in taking significant decision of hiring, fixing wages and setting prices will lag behind those acting otherwise once inflation returns to 2 per cent.

Kuroda eager to show he can raise inflation without slashing rates

The BOJ decided to hold rates steady despite the economy slipping into recession in the third quarter and the inflation staying far below the set target.

Izumi Devalier, Japan Economist at HSBC, holds that further stimulus is not in the pipeline for now and BOJ will not move unless the economy is faced with a deflationary shock. Analysts are of the opinion that the central bank is done with expanding stimulus even though they unanimously predicted that 2 per cent inflation will not be reached by the target time frame.

BOJ governor Haruhiko Kuroda is now trying to convince bond investors that inflation can be revived without the central bank easing policy further. Kuroda has turned the attention away from the core consumer-price index used to measure progress toward its inflation target. The BOJ began publishing an alternative gauge of inflation (core-core index) that does not include fresh food and energy prices. The core CPI measure, which strips fresh food and the effect of the consumption tax increase in April 2014, and the BOJ’s core-core index, which strips out both fresh food and energy have posted different figures since the beginning of 2015. The core-core index unlike the core CPI has been portraying a promising figure.

Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, and a former BOJ official said that CPI will not have to be at 2 per cent if deflation mindset gets removed and the inflation expectation move above zero According to him, bond investors are likely to be okay with an inflation rate of around 1 per cent if the BOJ continues to buy “some level of debt.”

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