So, one of the messages from the IMF has been to downgrade Japan's growth outlook. Do you think that's fair?
Kuroda: I think that in some sense it is fair because in the first quarter the Japanese economy grew by 4.5 percent but in the second quarter it contracted by 1.2 percent. We expect in the 3rd and 4th quarters the economy would come back to positive growth range but certainly recovery has been very moderate: maybe 1, 2, 1.5 percent or something this year next year. So although domestic demand, consumption, investment have been fairly robust, but you know, because of slowdown of emerging economies, our exports have been flat and production also has been very weak so some of the other adjustment made by the IMF is in some sense inevitable but we still think that recovery trend remains in Japan.
Commodity prices have had their biggest jump for many years over the last few weeks. Do you see that as a negative for your growth target?
Kuroda: You see from September last year, commodity prices in particular, all the prices went down quite sharply and since Japan is one of the biggest importers of commodities including oil, the Japanese economy benefitted greatly from improved trade and that made, for instance, the corporate sector enjoy historic high levels of profit and wages are also rising, so in general lower commodity prices help the Japanese economy to recover, but on the other hand there are many emerging economies dependent on commodity exports and more than 50 percent of Japan's export to emerging economies in Asia. That means that too low commodity prices could affect our exports so this slight recovery of commodity prices including oil I don't think it will seriously affect the Japanese economy negatively. I don't think so. On the contrary I think this slight recovery of commodity prices including oil prices may show that the global economy is still resilient, although the IMF slightly downgraded global economic outlook.
But you don't worry that if we get persistently higher commodity prices here and the yen remains weak that it will hurt consumers and choke off some of that domestic demand that you have been talking about.
Kuroda: Of course, as a sort of hypothetical case if commodity prices go up sharply, the yen depreciates sharply, that could affect the consumers. That is true. But at this stage, as you know, this recovery of commodity prices are occurring after sharp declines of almost all commodities including oil, so I don't think this would affect seriously the Japanese consumers and also the Japanese yen has been fairly stable, despite this kind of increased volatility in many financial markets including stock market, foreign exchange market, all over the world but Japanese yen has been relatively stable.
And that's your base scenario? That the yen stability will continue?
Kuroda: I think so. I suppose exchange rate is a difficult animal and the best approach is not to make any prediction for exchange rate! More seriously, I think the current range of Japanese yen exchange rate is not out of economic fundamentals, so that means that the current range of Japanese exchange rate may continue to prevail. But, of course, exchange market is subject to foreign financial markets so it may be subject to change, but at this moment I think the yen has been relatively stable compared with other major currencies and also Asian currencies.
The other thing the IMF said was they want you and the Bank to continue with easy monetary policy at this point and possibly go even further. Is there any sense of panic or crisis at the bank at the moment that your current policy is not working?
Kuroda: I think the current policy, so-called quantitative or qualitative monetary easing, has been working and making the intended impact on the economy and the financial market so that the economy is recovering and the underlying inflation dynamics is strengthening. Of course, headline inflation is, like many other countries, almost zero but if you look at it carefully, energy items may be declining by about one per cent or reducing CPI inflation rate by one per cent but non energy items are raising consumer price inflation by about one per cent, so they are cancelling out. But unless oil prices further decline, eventually in coming months negative impact from oil prices would dissipate, fade out, disappear and then one per cent inflation is quite likely to come and because of reduced output gap, because of quite tight labour market conditions I think we can approach 2 per cent inflation target sometime next year.
The financial markets think that you are going to increase QE before the end of the year. Are you?
Kuroda: I have been always telling the market that we aim at achieving the two per cent inflation target at the earliest possible time and the inflation dynamics is on track so we expect, more precisely I can say, that around the first half of the next fiscal year we may be able to achieve the two per cent inflation target, but of course the exact timing would depend upon oil prices and so on and so forth. Having said that, I have always added that if inflation dynamics change and if necessary we would not hesitate to adjust our monetary policy, so if necessary we can further ease our monetary policy, but at this moment the inflation dynamics is as we anticipated. So, at this stage we just continue QE, but if necessary we can adjust.
The ECB has used negative interest rates on deposits from banks as a way of continuing to ease. Would you consider that? Is that something you have looked at?
Kuroda: No. I mean, as you know, U.S. and the U.K., their economies are recovering in a very robust and solid way, so probably the U.S. and the U.K. would be the first to normalise interest rates. On the other hand, ECB and Bank of Japan will continue, for the time being, very accommodative monetary policy because economic recovery, yes, there's recovery but some are moderate and inflation rate is still very low, so that we would continue our extremely accommodative monetary policy. Now negative interest rate, we don't think it's necessary. As you mentioned, ECB certainly introduced negative interest rates but after that they embarked on QE and we have been implementing a large-scale asset purchase program, QE, for more than two years, so I don't think it's necessary to make interest rates negative.
There's a lot of debate about the what's the most effective way to push money through the channel into the real economy and looking at what you've done, there's both a sovereign debt purchase program but some ETF purchasing. Which do you think gives you the biggest bang for your buck, if you like, in terms of getting the money into the economy: through the equity channel or through the debt channel?
Kuroda: I think the debt channel at this stage is far bigger than the equity channel because if you look at the sheer size of our JGB purchase program, it's so huge. Our ETF purchase program is relatively limited because the main channel of our monetary easing is through large scale purchasing of government bonds. At the same time, we started ETF purchase in order to make risk premium reduce, so not to make money flow into the real sector through this ETF purchase. ETF purchase is to make risk premium contained so that private companies and financial institutions take appropriate risk in the market.
We've talked a bit about emerging markets and some of the threats. Japan's past experience has shown one of the ways you get better growth in the economy is by unwinding cross share holdings between companies, imposing good governance and encouraging companies to pay dividends and treat shareholders correctly. As you look at the problems in China, in Korea, in some other emerging Asian countries, do you think they could learn a lot from Japan's experience in its last crisis?
Kuroda: As you know, not only Japan, but also the U.S. and Europe, all of them have experienced such kind of transformation in corporate sector and I think that sort of corporate sector transformation is necessary in emerging economies not only in Asia but also Latin American and the Middle East and so forth because it is the necessary step to make their economies more resilient, more flexible and more innovative. Now China has been making great transformation from export-led, investment orientated economy to a more consumption orientated economy. This transformation is really a big change and in due course I think corporate management style as well as corporate governance in China would change accordingly. But at this stage, I think, the government in China is focusing on reforms in the state-owned enterprise, not immediately to be privatised, but the state-owned enterprises would be more efficient, effective and more, sort of, contributing to the economic transformation.
Just to understand you clearly, you would recommend Asian governments continue to embark on this kind of reform of their corporate sector?
Kuroda: I totally agree. Not just recommending the Japanese model, no, it's a model first started in the U.S. and spread through Europe and Japan.
One last question. Some economists worry that we are getting to the stage where government debt in Japan will exceed savings and then they say "game over, markets will no longer trust Japan". Do you think that's going to happen?
Kuroda: I don't think it's going to happen because at this stage, yes, government debt to GDP ratio is extremely high, so first of all the government is trying to reduce fiscal deficit and trying to contain the increase of debt to GDP ratio. Second, as you know, Japan still has a current account surplus and Japanese savings are quite enough to finance government debt. At this stage, about 95 per cent of JGBs are held by Japanese citizens, so at this stage I don't think that such a kind of immediate crisis is likely to happen, but at the same time I think the government must continue its effort to consolidate public finance because Japanese society continues an aging process and the government expenditures for health care and pensions would increase in coming years. So, government must reduce fiscal deficit before such expenditure increases significantly.
And I said last question but I've got one more for you. You've talked about demographics. CNBC is doing a programme next week on how Europe gets swagger, which means gets its confidence back. One issue that is facing Europe that you are already dealing with is the aging population and the consequences. What advice would you give to Europe about how it can prevent this being a drag on growth?
Kuroda: I think many European countries, particularly Nordic countries have made tremendous progress. Their total fertility rate has risen. At the same time, female labour participation ratio also increased, so these two are not inconsistent with each other. These two are possible to be achieved simultaneously, so Nordic countries has made tremendous progress, so I think European countries can learn from the experience of Nordic countries, not from Japan. Japan is in a quite different context, I think. Population is aging and population is declining and the government now has made it one of the new three arrows to raise total fertility rate to 1.8 and maintain the population and also manage aging society quite well.