WHEN: Interview Aired Today, Monday, April 15, 2019
WHERE: CNBC's Business Day programming
The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Bank of Japan Governor Haruhiko Kuroda and CNBC's Sara Eisen which aired on CNBC's Business Day programming today, Monday, April 15th. The following is a link to video from the interview on CNBC.com: https://www.cnbc.com/video/2019/04/15/bojs-kuroda-still-room-for-further-easing-if-necessary.html.
All references must be sourced to CNBC.
SARA EISEN: So, thank you so much for speaking to me again. We're here at the IMF meetings where everybody's talking about slower global growth. What's the outlook for Japan right now?
HARUHIKO KURODA: I think the Japanese economy has also slightly slowed down, partly because of Japan's exports to China-- has become somewhat weak. Particularly IT-related goods and capital goods. So, because of that, Japan's production also has become weak. However, Bank of Japan's recent business survey showed that corporations are still quite sure that they would make quite robust corporate investment this year. So, yes, exports have become somewhat weak and production has also become somewhat weak. But, corporations are still quite sure that they can implement a very robust sort of investment for the whole year. So, that is —
SARA EISEN: It's mixed?
HARUHIKO KURODA: Yeah. And, also, during the discussions here in Washington, D.C. I sensed, somehow, Chinese economy is likely to recover in the second half. Partly because of the huge fiscal stimulus measures the government has already decided. And some of them are already implemented. So, the first half of the year economy may be a bit weak in China—
SARA EISEN: You see it turning, though.
HARUHIKO KURODA: Yeah. But in the second half of the year, economy-- recover-- accelerate. And for the entire 2019, China's economy is likely to grow 6% plus. So—
SARA EISEN: And that he'll help Japan?
HARUHIKO KURODA: That's right. Yeah.
SARA EISEN: You've been very focused on the inflation—
HARUHIKO KURODA: Yeah, yeah. Yeah.
SARA EISEN: --target, prioritized that for the last few years. But, inflation has still remained subdued. Why—
HARUHIKO KURODA: That's right.
SARA EISEN: --is that?
HARUHIKO KURODA: Two factors. 1) Despite the very good corporate profit levels and also despite a very strong labor market situation, I mean, unemployment rate is only 2.3%, which is even in Japanese context, full employment. And yet, wages are rising somewhat moderately, modestly. That is one factor. Another factor is in the last five, six years labor productivity increase in Japan was the highest among G7 country. Higher than United States, higher than in Germany. So, wage costs certainly rose. But because of labor productivity increase, corporations can manage, without raising the prices. So, wages are rising, but moderately or modestly. Prices are not rising much because of huge labor productivity increase. So, at this stage, headline inflation rate is 1% or slightly less than 1%. And if you exclude energy items, then inflation rate, whole inflation rate is only about 0.4% or 0.5%.
SARA EISEN: So, what do you do? What do you do about that? You've done everything.
HARUHIKO KURODA: Yeah. Everything. And also, as I said, the economy's doing quite well. The corporate sector enjoys historic high-level profit. Better than they enjoyed during the bubble period in late '80s. And the labor market is quite tight. Probably the tightest in the last 30, 40 years. So, the economy, real economy is doing quite well. But, as I said, wages are not rising so fast as we hoped.
SARA EISEN: So, do you feel you have to do more?
HARUHIKO KURODA: I yeah. Yeah. I think, even so, I think the wages are now rising and accelerating. So, by maintaining current extremely accommodative monetary policy, the labor market continues to be tight. And output gap, at this stage, output gap is not negative. It's now even positive. So, by maintaining extremely accommodative monetary policy, maintaining a tight labor market-- we are reasonably sure that wages accelerate and prices also accelerate.
SARA EISEN: I did see that Amazon is raising prices in Japan for the first time since it's been there. That must be some sort of good sign for you. Did you see that?
HARUHIKO KURODA: So-- so I think-- I mean, particularly, in the service sector— restaurant, hotels— they are raising prices. Because they are quite labor intensive. And labor-intensive sectors finally raising prices. So, it takes more time than we thought before. Because we introduced the current extremely accommodative monetary policy in April 2013. Already—
SARA EISEN: Six years.
HARUHIKO KURODA: --six years. And yet, of course, when we introduced that monetary policy, the inflation rate was -0.5%. It's now at 1%.
SARA EISEN: So, it's worked?
HARUHIKO KURODA: Yeah. But we have--
SARA EISEN: It also--
HARUHIKO KURODA: --been patient.
SARA EISEN: Yeah. I mean, it raises the question though, that if we do, global economy face a steeper decline, or downturn, or even recession whether central banks, especially yours, has the policy ammunition to fight it.
HARUHIKO KURODA: Yeah, yeah. Of course, since our policy rate is -0.1% and the ten-year JGB rate is around 0%. But still, we can further reduce interest rates.
SARA EISEN: How negative can you go?
HARUHIKO KURODA: I mean, Japan's negative interest rate is just -0.1%. And as you may know, in Europe they have -0.5% or -.9 or -.7 or some percent-- I'm not saying that we would do that. But still, there's room for reducing long-term interest rate as well as short-term interest rate. And also, there are other ways to make monetary conditions more accommodative, especially through larger asset sales, asset purchase programs, and so on, so forth. So, I think-- there are still some room for further monetary easing—
SARA EISEN: If you need it.
HARUHIKO KURODA: Yeah, if needed. But at this stage, we don't think it's necessary.
SARA EISEN: Do you worry at all about the longer-term implications and the side effects of having so much—
HARUHIKO KURODA: Yeah. Yeah. Yeah.
SARA EISEN: --accommodation for so long?
HARUHIKO KURODA: I think a major side effect is its impact on the profitability of the banking sector. Because banks can make profit through the interest rate gap.
SARA EISEN: It's crushing them.
HARUHIKO KURODA: Yeah. It's almost-- almost-- nothing.
SARA EISEN: Right.
HARUHIKO KURODA: But, in the last five years or so Japanese banks recorded a relatively respectable level of profit. Why? Big banks increased their international lending. Local banks, they cannot increase international lending, so that their profit or income coming from the lending business declined. But two factors compensated. 1) Sharply declined credit cost. Because, now, bankruptcy is so
SARA EISEN: Low –
HARUHIKO KURODA: rare. So, credit cost has declined. That is one point. Another is, local banks sold a lot of JGBs to the Bank of Japan. And also, they sold some stock and shares with significant capital gain. So, because of these two factors, they can maintain relatively good profit level. But, these two factors cannot be continued indefinitely because credit cost is already quite low. Could-- could rise, credit cost. And also, they have sold a lot of JGBs as well as stocks and shares. And so that-- this way of making profit is limited. So, in the long run, I mean, for the last five, six years they maintained. But in the long run, local banks would have to make some restructuring or acquisition and merges and some new business—
SARA EISEN: To deal with it.
HARUHIKO KURODA: That's right. But so far, it's okay. And even local banks have enough capital so that even if their profit becomes negative, they can sustain for several years. But, as I said, eventually they have to create some sort of restructuring.
SARA EISEN: Are you surprised at the value of the dollar-yen given how much easing you've done relative to the Fed's normalization and where the ten-year yield is versus the U.S. ten-year yield?
HARUHIKO KURODA: Yeah, yeah.
SARA EISEN: I mean, the Japanese yen hasn't weakened that substantially.
HARUHIKO KURODA: I must say that the-- before we introduced quantitative and qualitative monetary easing in 2013, yen was overvalued. And, in the last five, six years, yen has stabilized around 110 to 120 or something, which is not undervaluation. Rather, I should say excessive appreciation or overvaluation was corrected. And the exchange rate has been quite stable now, despite—
SARA EISEN: So, you're satisfied?
HARUHIKO KURODA: Yeah, yeah. So-- and also, as you know, exchange rates are affected by many factors. Not just bilateral interest rate differential, but many factors.
SARA EISEN: Yes, when the trade war gets worse, the I mean, it-- it affects the dollar-yen.
HARUHIKO KURODA: At this stage, I don't know. Trade conflict is between U.S. and China. And I hope trade conflict be-- solved, relatively soon. I hope. I don't know.
SARA EISEN: How much do you think it's hurting the global economy?
HARUHIKO KURODA: I think already because of this uncertainty, investment in China has been affected. And so if this conflict is solved soon, that will be good for the Chinese economy and also for the U.S. economy. Yeah. But this is outside of the central banking—
SARA EISEN: But it's affecting the outlook. I mean, actually Japan is going to start trade talks with the U.S. next week.
HARUHIKO KURODA: Yeah.
SARA EISEN: Do you see this as a potential risk factor if our administration pursues the path of tariffs or tariff threats?
HARUHIKO KURODA: I mean, personally I don't think so. But, of course, this is up to trade negotiators. So, I don't know. But—
SARA EISEN: Have you looked at a scenario where if the U.S. put tariffs on Japanese car exports to the United States, what would that do the Japanese economy?
HARUHIKO KURODA: I don't know. Already most of Japanese cars sold in the United States are produced in the United States. So, I really don't think it's necessary for the U.S. to impose tariffs on Japanese car imports. And many of them, may be components for automobiles produced in the United States. And, by the way, the-- within the U.S. trade deficit-- years ago, 20 years ago-- a large part of the U.S. trade deficit was with Japan. But now, it's quite small. So—
SARA EISEN: $60 billion. The President still wants to eliminate it. Is that possible?
HARUHIKO KURODA: I'm not quite sure. Because bilateral trade is not a very important economic indicator. I mean, global current account –
SARA EISEN: Sure.
HARUHIKO KURODA: -- will be quite important. But it should be global multilateral and not only trade balance but service-trade balance, income account balance, and so on, so forth. So, I think for any economy, important-- variable is not bilateral trade figure but global current account figure. And the-- from this point of view, I think U.S. has been managing its economy quite well. Of course, some current account-- deficit. But quite manageable. And this shows that the U.S. is importing capital. And many of them are FDIs. But Japanese companies, European companies come to the U.S., doing business, creating jobs, hugely in the United States. So, I think from this perspective, as you know, the-- the G20 under the Japanese presidency will discuss global balances. How to avoid excessive global imbalances. Not bilateral trade balances.
SARA EISEN: Right. Yeah. It's good that you're taking over the conversation I guess this year. So, when you look globally, I mean, risk assets have performed very well in 2019.
HARUHIKO KURODA: Yeah, yeah, yeah—
SARA EISEN: It's been risk on. That's helped the dollar-yen. It's helped a lot, in terms of the economic outlook as well. Do you expect that kind of environment to continue?
HARUHIKO KURODA: It's-- I mean, according to the world economic outlook recently released by the IMF, they also think that this year growth rate will decelerate. Because last year growth rate was-- global economy, growth rate was 3.6%. But this year, they expect 3.3%. But next year, it would—
SARA EISEN: Bounce back.
HARUHIKO KURODA: --accelerate to 3.6%. And this is the main scenario. And it is most likely. If this is realized, I don't think there will be any financial market tumble or anything like that. But this mainline scenario is mainline.
SARA EISEN: What's the biggest—
HARUHIKO KURODA: There are a lot of-- a lot of downside risks.
SARA EISEN: What's the biggest risk to the global economy?
HARUHIKO KURODA: At this stage, I must say that trade protection. Not only between U.S. and China. There are some sort of protectionism. That is, I think, the most serious risk involved in the global economy. But, as I said-- I hope U.S.-China trade conflict will be resolved soon. By the way, IMF world economic outlook main scenario does assume U.S.-China trade conflict will not worsen, will not become so serious. If it worsens and becomes more serious, then—
SARA EISEN: Different outlook.
HARUHIKO KURODA: That's right.
SARA EISEN: Governor Kuroda, thank you so much.
HARUHIKO KURODA: Thank you.
SARA EISEN: I really appreciate you speaking to me—
HARUHIKO KURODA: Thank you.
SARA EISEN: Thank you.
HARUHIKO KURODA: I enjoyed it. Thank you.
SARA EISEN: Thank you.
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