By Leika Kihara
Bank of Japan Governor Haruhiko Kuroda said on Thursday he saw no need to take interest rates deeper into negative territory now, as the central bank's immediate focus was to pump money into cash-strapped firms and keep financial markets stable.
The BOJ applies negative rates to only a small portion of deposits financial institutions park with the central bank, which means there is "still substantial room for further reducing the policy rate," Kuroda said.
"At this moment, we don't think it's necessary," he said, shrugging off the need to cut the current -0.1% short-term rate target.
"The most important thing now is to provide necessary financing to firms through the banking system, and to make financial markets stable," he said in a seminar organised by the Financial Times, adding that the steps the BOJ took so far were "sufficient and appropriate."
Under a policy dubbed yield curve control, the BOJ guides short-term rates at -0.1% and the long-term rate around zero via aggressive asset purchases.
Kuroda has repeatedly said the BOJ has several options if it were to ease further including rate cuts, bigger asset purchases and an increase in market operation tools.
His latest remarks suggest that any additional steps in the near term will focus on aggressive asset buying and efforts to channel money more effectively to small firms, rather than rate cuts that are directly aimed at stimulating the economy.
Kuroda said Japan's economy will be "substantially depressed" in the first and second quarters as efforts to contain the pandemic hit consumption.
But he said the economy is expected to recover sometime in the latter half of this year as the impact from the pandemic subsides, allowing Japan to avert a return to deflation.
"We don't expect the Japanese economy to be trapped in deflation, defined as sustained and continuous negative price growth," Kuroda said.
The government declared a nationwide state of emergency a month ago, urging citizens to stay home and businesses to close to contain the virus. It lifted the emergency across a large part of the country on Thursday but left restrictions intact for big cities such as Tokyo.
The world's third-largest economy is on the cusp of a deep recession as the pandemic has paralyzes business activity and global trade. Japan has reported close to 16,000 coronavirus infections and over 650 deaths.
The BOJ expanded monetary stimulus for the second straight month in April, ramping up risky asset purchases and pledging to buy unlimited amounts of government bonds to cushion the economic blow from the pandemic.
Kuroda stressed the "extraordinary" measures the BOJ took in March and April were temporary steps aimed at easing the financial strain from the health crisis.
"Once the virus is contained and the economy starts to recover, these extraordinary measures will be gradually reduced," Kuroda said.
"But easy monetary conditions would basically continue," as it will take substantial time to achieve the BOJ's 2% inflation target, he said.
(Editing by Kim Coghill and Jacqueline Wong)