TOKYO (REUTERS) - Bank of Japan Governor Haruhiko Kuroda said consumer inflation will exceed 1 per cent in the first half of next year and help the central bank achieve its goal of changing the public's perception that deflation will persist.
In the past 15 years, Japan has been in a state of "deflation equilibrium" in which companies and households held off on investment and consumption on the assumption that prices will not rise, Kuroda said on Wednesday.
The BOJ is aiming to break that equilibrium through its aggressive monetary stimulus, so that companies and households will spend more now on expectations that prices will rise ahead, he said.
"The BOJ's monetary policy differs from that of other central banks in that it focuses on changing public expectations (on prices)," Kuroda said in a speech at a meeting of the business lobby Keidanren.
"We're seeing broad improvements in the economy, markets, public sentiment. This is the best opportunity to end deflation," he said, stressing the bank's resolve to maintain its ultra-loose policy until 2 per cent inflation is achieved.
The BOJ stunned markets by delivering an intense burst of monetary stimulus in April, pledging to accelerate inflation to 2 per cent in roughly two years via aggressive asset purchases in a country mired in prolonged deflation.
While core consumer inflation has approached 1 per cent mainly due to rising import costs, many investors and analysts doubt prices will rise quickly enough for the BOJ to meet its price target in the two-year timeframe it has pledged.
Some experts and former BOJ officials have even voiced doubts on whether it was feasible for Japan to aim for 2 per cent inflation, a level it has not seen even when the economy experienced an asset-price bubble in the late 1980s.
"Achieving 2 per cent inflation in the long run is desirable and not impossible. But I wonder whether the two-year timeframe is so important," said Hideo Hayakawa, a former BOJ executive and now senior executive fellow of private think tank Fujitsu Research Institute in Tokyo.
"Even if 2 per cent inflation is difficult, Japan may be able to sustain inflation around 1 per cent. That should be enough,"he told Reuters on Tuesday.
Kuroda, however, countered such scepticism, stressing that actual rises in prices will gradually heighten inflation expectations and encourage companies to raise wages and prices.
Higher inflation will also push up nominal interest rates and give the BOJ more flexibility to respond to economic deterioration with interest rate cuts, unlike now when that option is not available with rates virtually stuck at zero, he said.
"If many companies raise prices and wages simultaneously, it would have a positive effect on the economy as a whole," Kuroda said. "As policymakers, we have to come up with bold measures to change people's mind-set in such a way." Core consumer prices rose 0.9 per cent in October from a year earlier, marking the fifth straight month of gains, mainly due to the weak yen that has inflated import costs.
Analysts polled by Reuters expect data due out on Friday to show core consumer inflation hit a new five-year high of 1.1 per cent in November. But economists expect inflation to peak sometime next year as prices lose the boost from the weak yen.