Kuroda admits BOJ failed to meet two-year timeframe for price goal

[June 20, 2016]  By Leika Kihara

TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda acknowledged for the first time that the central bank failed to hit its inflation target in the two-year timeframe set in 2013, underscoring the challenges of eradicating the country's sticky deflationary mindset.

He also said responding to deflationary pressures and firmly stabilizing inflation expectations at desired levels has become an "unprecedentedly difficult challenge" not just for the BOJ but many other central banks.

In theory, inflation expectations should respond immediately to monetary policy changes if the central bank's commitment to aggressive monetary easing is deemed credible by markets.

"However, inflation expectations observed in practice are highly sticky and change only slowly," Kuroda said in a speech on Monday at Japan's Keio University, acknowledging that changing the public's perception that deflation will persist has been more challenging than anticipated.

Kuroda also said it was difficult for central banks to present policy options for all contingencies in advance, as the policy response to unanticipated events tends to involve a complex package of policies.

Japan's core consumer price index (CPI), which includes energy but excludes volatile fresh food costs, fell 0.3 percent in April from a year earlier, matching the drop in March which was the biggest annual decline in three years.

2-YEAR TIMEFRAME DEAD

In deploying its massive asset-buying program in April 2013, the BOJ pledged to achieve its 2 percent inflation target at the earliest date possible with a timeframe of roughly two years.

"It's true we couldn't achieve (our 2 percent inflation target) in two years," Kuroda said when asked by an attendee why the timeframe was set.

But he said the central bank had no plan to change its commitment to achieve the target at the earliest possible date.

Kuroda also defended the BOJ's decision in January to add negative interest rates to its massive asset-buying program, saying the hit to financial institutions' profits from the policy is "really limited".

Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference in Tokyo, Japan, June 16, 2016. REUTERS/Thomas Peter

"Negative interest rates were quite new in Japan... so initially there was some confusion and uncertainty. But now the new policy framework is well understood and having a positive impact on the real economy," he said.

Kuroda also said central banks can present signals on what could prompt them to change monetary policy but cannot reveal in advance when it will do so, as that would rob them of the flexibility to deal with changes in the economy, Kuroda said.

"We've always said we won't hesitate to take additional easing steps if needed. But we can't show in advance when we will do so and how," he replied to a question after the speech, adding that the BOJ never intended to maximize the effect of its easing steps by surprising markets with timing.

(Reporting by Leika Kihara; Editing by Richard Borsuk)

[© 2016 Thomson Reuters. All rights reserved.]

Copyright 2016 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.