Former BOJ Governor Kuroda on Economy

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00:00Kureda-san, good to have you with us.

00:01I mean, lots of expectations that the BOJ will not move today, but in December.

00:06What are your own thoughts on that?

00:09Of course, the Bank of Japan is in the process of normalizing monetary policy

00:15because 2% inflation target was already met.

00:20And the economy is growing 1.5% or something like that.

00:24And unemployment rate is only 2.6% or something, super, full employment.

00:33So, naturally, Bank of Japan has been raising policy rate and reducing balance sheet.

00:42But for the last five meetings, they just stopped normalization

00:49because Trump tariffs may have major impact on the Japanese economy.

00:56So, Bank of Japan people were looking at the impact of Trump tariffs on the Japanese economy.

01:03But now, the impact appears to be less than concerned about a few months ago

01:14so that I think they would restart the normalization process.

01:20So, there is actually an argument for the BOJ to move today, no?

01:25There's no reason for it not.

01:26Maybe, but I'm not quite sure whether they would move today or not.

01:34But anyway, they may move today or next meeting in December.

01:41Newly minted, Prime Minister Takeuchi has said that to get to that 2%,

01:46inflation should be driven by wages.

01:49It is something that you have suggested yourself.

01:51Are wages at a place where it can drive inflation in Japan?

01:58Already, I think the wage price nexus has started.

02:06And I think the current situation is that although the initial inflation acceleration

02:14was caused by a currency price rise and weakening of the yen after the Ukraine war in 2022,

02:25but now wages are rising and wage price nexus has been operating

02:31so that I think there's no reason to continue to stop normalization.

02:39The Bank of Japan was looking at the impact of Trump tariffs on the Japanese coin.

02:47And now, it is relatively clear that the impact will be not so large.

02:53So, they would restart normalization.

02:57So, you're confident that wage increases can be sustained?

03:00Yeah.

03:01Let's take a look at the currency, the yen.

03:04It's been weak.

03:05How much is that a consideration for the BOJ?

03:08Is that a key factor?

03:11Of course, exchange rate policy is under the Ministry of Finance responsibility.

03:18But exchange rate affects the inflation rate.

03:22And the current yen dollar exchange rate, which is 153 yen to the dollar or something like that,

03:31that is too weak.

03:32And I should say that at some stage, the yen dollar rate would recover toward 120 or 130 yen to the dollar.

03:42And so, current exchange rate is too weak.

03:48And that has been causing inflation acceleration.

03:52So, although exchange rate policy is not under the Bank of Japan responsibility,

04:01but of course, U.S. may raise policy rate.

04:08And Japan may do something other than that.

04:16And interest rate differential might be narrowed down.

04:24And then, of course, yen would appreciate that I would depreciate.

04:30And anyway, I think the Bank of Japan is mainly concerned about the negative impact of Trump tariffs.

04:41And that has not been so large.

04:46So, I think anyway, Bank of Japan would restart normalization.

04:50You talked about how the yen should get to 120.

04:53120.

04:53When do you see the yen getting to that level?

04:57What will it take?

04:58You know that exchange rate prediction is almost impossible.

05:05So, I don't...

05:06But give us a sense.

05:07What will it take for the yen to get there?

05:08What needs to happen?

05:09Yeah, one thing is, of course, interest rate differential should be narrowed down.

05:18And the second is, I think, many market economists, as well as financiers,

05:27have become somewhat too pessimistic about the Japanese economy.

05:33But I should say that the Japanese economy has recovered from the 15-year-long deflation with

05:41higher percentage growth or something.

05:45The economy is growing by 1.5% and the inflation rate is 2-3%.

05:52So, deflation is completely overcome.

05:57And the Japanese economy is on a stable growth path of 1-1.5%.

06:02So, but still, many financiers and market economists continue to be somewhat pessimistic about

06:13the Japanese economy.

06:13This is, I think, wrong.

06:17But until and unless they shrug those unnecessary pessimism, the yen might be somewhat weak.

06:29Part of the pressure on the yen has to do with plans for the government to spend more, to cut rates.

06:36What do you make of Prime Minister Takeichi's plans to do that?

06:39Yeah, of course, if the government expands fiscal expenditures or make substantial tax cuts by so doing,

06:54the issue of government bond would increase and so on and so forth.

06:59That could make, of course, long-term interest rate rise.

07:02On the other hand, the yen might be weaker.

07:08But why do they think so?

07:11I mean, their idea is by expanding expenditures or reducing tax burden,

07:20the economy might be experiencing higher inflation or something like that.

07:29But at this moment, it's not likely.

07:33So, although some expansionary fiscal policy may raise growth, economic growth,

07:45and may slightly raise inflation rate,

07:49but I don't think inflation rate goes up to 4%, 5% and something like that.

07:55So, you're saying that longer-term, the spending plan will not add to the risks to Japan?

08:01Because I understand those expansionary fiscal policy is not just increasing consumption,

08:14but increasing investment, public investment, private investment in technological advancement and so on.

08:23That would raise potential growth rate, and that would be anti-inflationary.

08:29So, yes, expansion of fiscal expenditure might raise inflation,

08:38but on the other hand, the particular fiscal policy now that government is thinking about

08:47is to raise investment, not consumption.

08:54So, I think that would raise potential growth rate in the long run.

08:58Kuroda-san, we're keeping a very close eye on the U.S.-China trade deal

09:03that could come out anytime, hopefully soon.

09:07What's your take on the implications from that?

09:11Yeah, I think that would be good for the world economy because the world economy has been slightly decelerating.

09:20According to the IMF World Economic Outlook issued last month,

09:25the world economic growth will decelerate from 3.3% last year to 3.2% this year and 3.1% next year.

09:37The basic causes of slowing down of the world economic growth have been two.

09:46One is U.S. economic slowdown, Chinese economic slowdown.

09:49Both of them have been caused by Trump tariffs.

09:56And the trade war between U.S. and China has been hurting U.S. economy as well as Chinese economy.

10:07But the end of trade war could mean that U.S. economy and Chinese economy could accelerate growth without inflation.

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