Japan’s Economy on Road to Recovery, Central Bank Says

TOKYO — Three months into Japan’s bid to reinflate its economy after years of falling prices, the country’s central bank said Thursday that economic conditions were starting to recover, signaling its confidence that the world’s third-largest economy was on the cusp of a long-awaited turnaround.

It was the first time since January 2011, before Japan’s natural and nuclear disasters in March that year, that the Bank of Japan had ventured to use the phrase “recover.” The bank’s message is underpinned by a rebound in Japan’s mainstay exports, helped by a weaker yen, as well as some signs of a broader recovery in consumer spending.

Reflecting its optimism, the central bank’s policy-setting board left monetary policy unchanged and stuck to its goal of hitting 2 percent inflation in two years. To get funds flowing again in the Japanese economy, the bank, led by Governor Haruhiko Kuroda, has pledged to pump 60 trillion to 70 trillion yen, or about $600 billion to $700 billion, into the economy annually.

“Japan’s economy is starting to recover moderately,” the bank said in a statement released at the end of its two-day meeting. For proof, it pointed to a pickup in corporate investment and profits, industrial production, and both business and consumer sentiment.

After years of disappointing growth, Japan’s economy is showing signs of a comeback, thanks to what economists have called the bold economic policies of Prime Minister Shinzo Abe: an aggressive monetary policy, heavy government spending and a set of pro-growth reforms.

Japan is now growing faster than any of the Group of 7 leading economies, logging an annualized G.D.P. growth of 4.1 percent in the first three months of the year. This week, the International Monetary Fund raised its growth outlook for Japan to 2 percent for 2013, putting it well ahead of its G-7 peers. The Tokyo stock market has gained 40 percent this year.

Economists, along with Mr. Abe, have taken to calling his economic program “Abenomics.” The term has featured prominently in campaigning for the July 21 elections for Japan’s upper house of Parliament, which Mr. Abe’s ruling Liberal Democratic Party is favored to win by a landslide.

Still, the central bank acknowledged that it could take time for an all-around recovery in prices to take hold after 15 years of deflation, scaling back its shorter-term inflation outlook. The year-on-year rate of change in consumer prices, excluding fresh food, is still zero, it said, though some indicators suggested a rise in inflation expectations.

Meanwhile, jitters over volatility in government bond markets have also receded in recent weeks, after the bank adjusted the way it conducts its purchases in that market, minimizing any disruption. Despite Japan’s sky-high public debt, long-term interest rates remain far lower than those in the United States or in Europe.

Even as the Fed debates when to phase out its stimulus, the focus in Japan has turned to when the central bank might push ahead with more easing. But the bank’s willingness to stand pat on monetary policy, and on its 2 percent inflation target, nevertheless suggests that the bank is comfortable with letting its program play out in the wider economy for now, economists said.

In a note to clients, Kyohei Morita, a Japan economist at Barclays, said he was pushing back his projection for further easing from the central bank to next April, from an earlier forecast of October this year. A slowdown in government spending as post-disaster reconstruction demand winds down could hurt growth projections for 2014 and force the bank’s hand, he said.

He was optimistic that growth, for now, would receive wide support from strong consumer spending, buttressed not only by improving sentiment but on the impending mass retirement of the country’s postwar baby boomers, who are expected to turn en masse from net savers to net spenders.

“Japan’s economy is increasingly characterized by strong personal consumption, supported by Abenomics and the baby-boomer generation,” Mr. Morita said.

Article source: http://www.nytimes.com/2013/07/12/business/global/japans-economy-on-road-to-recovery-central-bank-says.html?partner=rss&emc=rss