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Interview with Haruhiko Kuroda, Governor of the Bank of Japan, at the World Economic Forum 2017

Following are excerpts from an interview Geoff Cutmore with Haruhiko Kuroda, Governor of the Bank of Japan at the World Economic Forum 2017.


GC: So let me start by asking you, are you surprised at how quickly economists are revising expectations for global growth, and growth in the United States, on the back of Donald Trump's election?


HK: Yes and no. Yes, market reaction has been so strong positive, that is not what I expected. On the other hand, as you may know, even before the presidential election, the US economy growth and its performance has been improving. So, as I said, no, in the sense that already the US economy had been improving, particularly in the second half of the last year, and then we had the presidential election, and the market reacted very positively. So that is my analysis.


GC: And as you look at the policy ideas that are coming out of his administration that's coming together, do you think it will net net be good for global growth over the next four years?


HK: I think as far as his fiscal policy, fiscal stimulus package is concerned, I think it's good, because large-scale tax cuts, coupled with significant investment in infrastructure, that would raise US economic growth in coming years, and that would also raise global economic growth in coming years. So that part, I think is definitely good. On the other hand, his advocacy of somewhat protectionist trade policy I think could be a matter of concern. However, on balance, I think there would be no full-blown trade war between US and China and whatever. I don't think so. So although protectionist policy is not good for the world economy, not good for even the US economy, but on balance, I think fiscal stimulus would dominate the US economic growth in coming years, and also could affect the positivity of the world economy.


GC: Would Japan benefit from trade friction between Washington and Beijing?


HK: No, because as you know, trade relationship is so multilateral and complicated, so called global supply chain. So if US and China, the world's biggest economy and the second biggest economy, engaged in trade wars, some serious trade conflict, that would affect Asia, Europe, the western hemisphere, everywhere. So that is not good at all. Not good for Japan.


GC: Donald Trump has been, even before being inaugurated, determining policy by tweeting, and he's tweeted a lot about the Chinese devaluing their currency, but he hasn't said much about Japan, and the fall in value of the Yen against the Dollar. Why do you think that is?


HK: I think partly because Japan now has a much smaller trade surplus, vis a vis the US, vis a vis the world. Also, as you may know, the Yen, suddenly in the last couple of months depreciated somewhat, but the current level, it was stronger than the level prevailed 12 months ago, or 11 months ago. So yes, in the last couple of months the Yen has somewhat depreciated, weakened, but if you look at the currency movement in the last 12 months, 24 months, then it is not so big.


GC: So the currency level of the Yen is not something that should really concern Japan's trade partners. You think it's about right.


HK: I think so. About right or not, it's a big question, because exchange rate-, what I can say is that exchange rates should reflect economic fundamentals, and be stable, because economic fundamentals move very slowly. So if the economic fundamentals move slowly, then exchange rates also move slowly, not gyrate like those exchange rates in the last couple of weeks.


GC : Volatility was the story of 2016, wasn't it? Do you think volatility is going to calm down in FX and capital markets in 2017?


HK: I think so. As you just said, in the first half of the last year, there was some concern about emerging economies, including China, and some concern about slowdown of the US economic growth, but in the second half of the year, I mean, great concern about the Chinese economy was not real, and the Chinese are going to continue to grow by 6.5% or so, and the US economy growth in the second half of the year substantially improved, and now US economic growth is very robust, very strong. So reflecting this kind of economic movement, somewhat exaggerated by the market, the market was so pessimistic in the first half of 2016, but then in the second half of the last year, the market was gradually improving, and then we had the US presidential election and the market moved, completely changed.


GC: Is there a possibility here, that because of Donald Trump's election, that inflation and growth in Japan is stronger than you previously expected, and that he'll have done a better job than the BoJ of getting inflation back?


HK: I think so far, as the US economic growth accelerated and the world economic growth strengthened, of course the Japanese economy would benefit, and that is true, but at the same time, already the Japanese economy has been growing by about 1.5% the current fiscal year, and we expect that also in the next fiscal year. So the Japanese economy is on track, and of course the world economy, fast improved economic growth could somewhat accelerate, and that could make achieving 2% inflation target, or slightly less difficult.


GC: So that would suggest that it comes earlier, and you may actually begin to think about tapering.


HK I think it's too early to think about tapering or changing our monetary easing position. I think-, because the economy is growing, that is true, and corporate profit levels are at a record high, and the unemployment rate is only 3%, which is close to full employment, so the economy is okay, but prices are still very slowly moving, and our inflation-, core inflation rate is positive, core inflation rate excluding fresh food and energy items, but inflation rate excluding only fresh food is still slightly negative, or close to zero, so we are still a long way before we can think about exiting from the current, extremely accommodating monetary policy, and as you said, tapering or whatever. It's too premature, it's, it's not-,


GC: It's not in your playbook right now.


HK: Not yet, not yet.


GC: Let me finish by asking you about some of the risks, because we've seen the 10-year treasury yield pushing out towards that 2.6 level. Obviously the dollar has been very strong, even Donald Trump is tweeting now, about the strength of the dollar. Do you think we should be worried, maybe not immediately but later in the year, if these trends continue, that one, high rates will be very bad for anybody that owes money in dollars, in the emerging world, in Japan and elsewhere, and that two, if the dollar remains too strong, it could be distortionary. We may need a new Plaza Accord, or there will be currency wars.


HK; I think, at this stage I don't think these two things as you've just mentioned would materialize. Yes, interest rates in the US are rising, yes in the last couple of months the dollar has appreciated somewhat ,and of course if interest rates in the US continue to rise substantially, and if the dollar continues to appreciate substantially, these would affect emerging economies which have been so much dependent on capital inflow into their economies. But Japan, or Europe, they are not dependent on capital inflow from the US. So two things. One, at this stage I don't think such sharp, substantial increase in US interest rate would materialize soon. Second, I don't think that the dollar will sharply strengthen in the coming months, affecting emerging economies. I don't think so. But even if these things were to happen, in coming years, not right now, I don't think developed countries are much affected. But certainly some emerging economies may find difficulty in these situations, but at this stage no, and as you know, IMF long argued that the US economy would continue to grow, and US monetary policy would be normalized, that means that the interest rate in the US would gradually rise, and that would affect emerging market economies through exchange rate, interest rate channels. So that's a matter to be carefully watched in the world. But as I say, I don't think there is an immediate risk, as you alluded, and even in the long run, I think nowadays, emerging economies are much more robust than during the global financial crisis, or during the Asian financial crisis in the late 90s.


GC: I said last one, if I could just have one more and reach the economist in you. Japan has been pursuing fiscal policy

ever since its own debt crisis, with very mixed results, it has to be said. Why does Donald Trump think that fiscal policy in the United States will be any more successful?


HK: I think the so-called abenomics in the last four years, monetary policy, fiscal policy and structural policies, all three policies were mobilized, and as I said, the real economy substantially improved. So I think in the last four years, fiscal policy has been, on balance, simulative, and contributed to improving performance of the Japanese economy. But the US situation is a matter to be carefully analyzed by US economists.


GC: Thank you so much. Good to see you.