TOKYO (Reuters) - Bank of Japan policymakers signaled that they have offered enough monetary stimulus for now to beat deflation, calling for government efforts to deregulate the economy and cope with a shrinking labor force that is keeping price growth weak.
BOJ Deputy Governor Hirohide Yamaguchi said the central bank will not rule out further easing if risks in Europe materialize and exert strong downward pressure on Japan’s economy.
But he signaled that Japan will likely achieve the BOJ’s 1 percent inflation target without further monetary easing steps, saying the bank’s stimulus measures in February and April have heightened the chance the economy will resume a recovery.
“The decision on whether further easing is necessary would depend on whether the economy and prices undershoot our forecasts, and whether such risks heighten,” Yamaguchi said in an interview with the Nikkei business daily that ran on Wednesday.
“Monetary policy is not something that is done automatically,” he was quoted as saying.
BOJ Governor Masaaki Shirakawa, in a speech delivered on Wednesday, did not speak directly on monetary policy but said Japan’s rapidly ageing population was partly behind the grinding deflation that has plagued the country for more than a decade.
Yamaguchi’s remarks are in line with recent signals from BOJ officials, who are keen to pause on monetary easing unless a disorderly Greek exit from the euro zone shocks markets and triggers a spike in the yen, threatening Japan’s recovery prospects.
Yamaguchi added that while the BOJ will not hesitate to act again if further easing is needed to beat deflation, monetary policy alone was not enough to overcome price falls and that government measures to boost the economy such as deregulation was needed.
The BOJ set a 1 percent inflation target and eased policy in February, and followed up with another stimulus in April in a show of its determination to beat deflation.
Central bankers have been trying to cool market expectations that the BOJ will continue to ease frequently until 1 percent inflation is achieved, regardless of how the economy is performing.
Shirakawa, in the speech to a gathering of central bankers and academics hosted by the BOJ, said Japan has underestimated the widespread effect an ageing population has on the economy, such as a shrinking labor force, sharp rises in social welfare costs and changing spending patterns.
“Demographic changes have affected the Japanese economy slowly but steadily and profoundly,” Shirakawa said.
“Downward pressure on the Japanese economic growth rate resulting from various channels reflecting the continuing population aging will persist for the foreseeable future.”
Shirakawa stressed that Japan’s ageing population is partly behind deflation, saying that while the correlation between money growth and inflation has been waning among major advanced economies, that of population growth and inflation has been positive over the past decade.
U.S. and European countries, which also face ageing societies and shrinking working-age populations, may experience the kind of deflation Japan is undergoing now, he said.
“I cannot entirely rule out the looming menace that may unveil itself into downward pressure on inflation rates if such demographic changes are to undermine the momentum toward income creation in the economy,” he said.
Shirakawa has long stressed that monetary policy cannot cure all ills and that long-term efforts by the government and private sector to bolster Japan’s potential growth were also needed.
Reporting by Leika Kihara; Writing by Edwina Gibbs; Editing by Richard Pullin, Paul Tait and Jonathan Hopfner