The Bank of Japan stands ready to ramp up stimulus if the economy's recovery is derailed, Deputy Governor Masazumi Wakatabe said on Wednesday, warning that the coronavirus outbreak could hurt corporate sentiment and global trade.
Wakatabe said Japan's economy is likely to have emerged from a sharp but temporary slowdown late last year helped by robust domestic demand and easing Sino-U.S. trade tensions, signalling that no immediate monetary easing was on the horizon.
But he said risks remain high, as last year's sales tax hike hurt household income and lingering uncertainty over the global outlook weigh on business sentiment.
"There have been heightening uncertainties regarding the impact of the spread of the coronavirus on the global economy," Wakatabe told business leaders in Matsuyama, western Japan.
"The BOJ...won't hesitate to take additional easing steps if there is a greater possibility that the momentum toward achieving its 2% price target will be lost," said Wakatabe, who is seen as an advocate of aggressive monetary easing.
Japan's economy, the world's third largest, likely suffered a contraction in the final quarter of last year as a domestic sales tax hike in October and slowing global demand hurt consumption and exports.
The BOJ expects the economy to recover this year and help fire up inflation toward its 2% target, clinging to hope that global growth will rebound around mid-year and underpin exports.
But the widening fallout from the coronavirus has cast doubt on the central bank's rosy projection, putting it under pressure to maintain or even expand its massive stimulus.
Ten people on a cruise liner in the port of Yokohama have tested positive for coronavirus and Japanese authorities have joined governments around to world to monitor its borders as infections rise and the death toll from the outbreak climbs to almost 500.
Wakatabe said the BOJ's ultra-loose policy helps maximize the benefits of the government's spending package on the economy, signalling the central bank is doing enough for now to support growth.
He added, however, that the BOJ must maintain its policy bias toward additional easing and remain on guard against risks that could derail a fragile recovery.
"Japan's inflation has yet to reach our 2% target. The risk of the country slipping back into deflation has not been completely dispelled," Wakatabe said.
Under a policy dubbed yield curve control, the BOJ guides short-term interest rates at -0.1% and the 10-year government bond yield around 0% as part of efforts to hit its price goal.
While stubbornly low inflation has forced the BOJ to sustain its radical stimulus, many central bankers are wary of loosening policy further due to the rising cost of prolonged easing such as the strain it inflicts on financial institutions.