Bank of Japan Governor Haruhiko Kuroda showed confidence Friday in achieving the central bank's 2 percent inflation target to beat deflation, saying that the Japanese economy is moving "smoothly" toward the goal.
But for the economy to realize sustainable growth, it is an "essential condition" that the government establish "a sustainable fiscal structure," the BOJ chief said, ahead of a decision by Prime Minister Shinzo Abe early next month on whether to raise the nation's sales tax as planned in April.
He added that the stable moves of Japan's long-term interest rates reflect trust of the market and the public that Japan is making efforts to restore its fiscal health.
"The government needs to steadily make progress to achieve a sustainable fiscal structure and we strongly expect it," he said in a question-and-answer session after delivering a speech in Tokyo.
With steady progress of the central bank's large-scale monetary easing policy, introduced in April, "Japan's economy has been proceeding smoothly along a path toward achieving the price stability goal of 2 percent," Kuroda said.
Unlike past economic recovery driven by exports, and then followed by improvements in employment and income, the latest recovery is led by domestic demand such as consumer and public spending, Kuroda said.
In order for the country to keep up with the recovery, Kuroda said it is important for exports, production and capital investment by the manufacturing sector to improve, though they have been lagging behind.
On overseas economies, which are crucial for Japanese manufacturers, Kuroda said they are "gradually heading toward a pickup" as a whole, though some weakness has been seen in some parts.
"The baseline scenario is that the global economy will pick up gradually as the U.S. and European economies improve," he said. "This will underpin an increase in exports and production, leading to a pickup in the manufacturing sector's business fixed investment in Japan."
The bank's monetary easing policy, aimed at achieving the 2 percent inflation target in two years, centers on doubling the monetary base and boosting purchases of government bonds.
Kuroda said achieving the target temporarily is not sufficient and that it is important to maintain the 2 percent inflation in a stable manner.
"It is necessary for not only the observed inflation rate but also medium- to long-term inflation expectations to be about 2 percent," he said.