Bank of Japan Governor Haruhiko Kuroda said Friday that powerful monetary easing over the past decade has produced far more economic benefits than side effects, but its failure to help the central bank attain its 2 percent inflation target was "regrettable," as he chaired the last policy meeting of his tenure.
After the central bank decided to maintain ultralow rates, Kuroda said monetary easing should continue to ensure more aggressive pay hikes, the missing link to the inflation target, as he gets ready to hand the reins to academic Kazuo Ueda next month.
Financial markets are rife with speculation that the leadership transition will also herald a shift from the current ultraloose monetary policy, especially as its program to keep borrowing costs extremely low has exposed its limits and vulnerability to market pressure.
Kuroda acknowledged that bond market distortions under the so-called yield curve control program have yet to be fully fixed despite the central bank's surprise decision in December to loosen its grip on yields.
The BOJ should stay the course when Japan's persisting deflationary mindset -- the view that prices and wages will not rise -- may finally be changing, the governor said.
"If monetary easing remains in place, it will be possible to attain the price stability target in a sustainable and stable fashion accompanied by pay rises," Kuroda told a press conference after his final monetary policy meeting.
"The benefits of monetary easing for the economy have far outweighed the side effects," he said, adding that he has done all he could during his time as governor. "It's too early to consider an exit strategy."
The BOJ set short-term interest rates at minus 0.1 percent while guiding 10-year Japanese government bond yields to around zero percent under the yield curve control program.
It defied some market speculation that the recently-set 0.5 percent cap on the benchmark 10-year bond yield will be raised further, renewing its resolve to defend the limit through unlimited bond purchases.
The dollar spiked by around 1 yen toward 137 yen in a knee-jerk reaction as the regular two-day policy meeting ended without any surprise decisions, which have characterized his 10-year tenure.
Friday's decision to maintain policy comes as the BOJ expects Japan's inflation, currently well above the BOJ's target of 2 percent, will start falling later this year.
Any future unwinding of Kuroda-era monetary easing will be left up to Ueda, an academic who will assume the post of governor on April 9 following his approval by parliament on Friday.
"Communication with financial markets is never easy. The bottom line is to explain clearly what we want to do and how," Kuroda said. "I've done my best, but I wouldn't say I was perfect in my messaging."
The BOJ's unwavering stance on monetary easing has made it an outlier among major central banks, which have been stepping up their fight to curb inflation with aggressive interest rate hikes.
Japanese bond yields are expected to face upward pressure, and a weaker yen may persist after U.S. Federal Reserve Chairman Jerome Powell pointed this week to higher and potentially faster rate hikes amid stubbornly high inflation, analysts said.
"The BOJ has been forced to buy government bonds aggressively to maintain YCC, which will be its biggest concern for the time being," said Takahide Kiuchi, executive economist at the Nomura Research Institute, referring to the yield curve control program.
Kiuchi, a former BOJ board member, expects the central bank, under the next governor, to raise the 10-year yield cap further or remove it in April or June to make the existing monetary easing framework more "flexible."
For now, Ueda, the incoming governor, is on the same page as Kuroda regarding the need to maintain monetary easing. But he has acknowledged the heavy responsibility of leading the central bank when there is no room for "wrong judgments," leaving the door open for a future overhaul of the yield curve control program.
Kuroda took the post in 2013 when politicians criticized the central bank for dragging its feet on monetary easing. A decade later, he declared the past decade of monetary easing a "success" because it had created jobs and helped Japan emerge from a state of deflation.
He dismissed the view that its massive holdings of government bonds and exchange-traded funds on its balance sheet are "negative" aspects of his time at the central bank.
Ultraloose monetary conditions have failed to jolt the economy out of low growth and raise productivity, while its side effects, especially the distorted bond market and looser fiscal discipline, have become more evident.
The BOJ said in its statement it expects both short-term and long-term interest rates to remain "at present or lower levels," pledging to take additional easing steps should the need arise.
Despite extremely high uncertainty over the outlook, Japan's economy has "picked up," the central bank said in retaining its assessment.
The policy meeting was also the last for deputy chief Masayoshi Amamiya, a key figure in the design of the policy framework in recent years, including the yield curve control program, who was once seen as a strong candidate to succeed Kuroda. The other deputy governor, Masazumi Wakatabe, is also leaving the BOJ with Amamiya on March 19.
"We are closer (than before) to the goal but not there yet," Kuroda said of the 2 percent inflation target.
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