Bank of Japan Governor Haruhiko Kuroda said he won't hesitate to provide further monetary stimulus if downside risks from a planned sales tax hike or overseas economies increase, according to an interview in the Mainichi newspaper on Wednesday.
Japan's economy isn't likely to slow if the government proceeds with a plan to raise the sales tax, and the government should take firm steps toward fiscal discipline, Kuroda was quoted as saying.
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However, when asked if additional easing was possible if the sales tax hike caused a temporary contraction, Kuroda indicated that the central bank has the capacity to ease policy to achieve its price target.
"If things go according to our main scenario, additional easing won't be necessary," Kuroda said, according to a transcript of the interview.
"But you never know what is going to happen. You can't determine how to respond in advance, but if something did happen we wouldn't hesitate to respond."
Kuroda's remarks came amid signs the government is wavering over whether to proceed with a planned two-stage hike in the sales tax from next year, or opt for a more moderate rise to ease the pain on an economy just emerging from stagnation.
Japan's economy expanded for three straight quarters in April-June as Prime Minister Shinzo Abe's reflationary policies brightened sentiment and bolstered personal consumption.
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But growth slowed in the second quarter on an unexpected fall in capital expenditure, casting doubt on whether the economy can withstand the pain from the planned sales tax hike next April.
The BOJ unleashed an intense burst of monetary stimulus in April, pledging to nearly double the monetary base to 270 trillion yen ($2.8 trillion) by the end of 2014 via aggressive bond purchases to end deflation and achieve its 2 percent inflation target in two years.
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The central bank has stood pat since then.
Improvements in personal consumption and investment show that the BOJ's expanded quantitative easing is heading in the right direction, Kuroda was quoted as saying.
The BOJ's purchases of government debt are also supporting the economy as this is helping to keep interest rates low, Kuroda said in the interview.