Monetary policies will have to be considered as the spread of the novel coronavirus presents “the biggest uncertainty for Japan’s economy,” Bank of Japan (BoJ) Governor Haruhiko Kuroda said in an interview with The Sankei Shimbun on February 17.
Noting that he is closely monitoring the situation, the BoJ governor expressed his intent to “implement additional measures without hesitation” should risks arise from price escalation.
A Cloud of Negative Economic Growth
Figures released on February 17 showed negative growth for Japan’s real gross domestic product (GDP) for the period of October to December 2019. Nevertheless, Kuroda stated that while he did not anticipate this major downturn in the steady economic growth rate of the past two years, the momentum and extent to which the coronavirus outbreak lasts will be a key factor from here on.
Kuroda emphasized that he would not hesitate to implement additional monetary-easing measures if effects on the economy from the virus appeared to warrant them. Governor Kuroda also expressed hope that there would be an early weakening of the spread of the novel coronavirus: “The question is when we will get over the hump and return to normal. It took about six months for the severe acute respiratory syndrome (SARS epidemic of 2002-2003) to be declared over.”
Kuroda reiterated the view of some experts that, while China’s domestic production activities bottomed out in the first quarter of 2020, production could potentially recover from April onward. Kuroda said that the global economic growth rate, as well as Japan’s own rate, “has very little chance of experiencing an extremely large decline from last year.”
At the moment, though, the outbreak does not seem to be slowing down. Fatalities from the novel coronavirus already exceed worldwide deaths from SARS, and Japan has recorded fatalities as well.
Japan’s tourism has taken a hard hit as restrictions have been placed on the free movement of people potentially exposed to the virus. Likewise, delays in production activities in China have caused confusion in corporate supply chains. If the crisis is drawn out, the global economy could suffer a huge blow.
For this reason, Governor Kuroda stressed that his biggest concern is the uncertainty of just when the spread of the virus will peak and taper off. Kuroda will continue to exchange information with overseas authorities and keep a close watch on the situation.
Digital Renminbi Will Not be an International Currency
The BoJ governor also addressed the topic of digital currencies. Referring to the BoJ’s research on legal digital currencies in cooperation with five other central banks, including the European Central Bank (ECB), he said, “Considering advances in technology and changes in the international financial environment, legal digital currencies could become necessary in the future.”
He stressed, however, that no plans exist for issuing such currency at present. Moreover, he expressly rejected the idea that the six major central banks are working together to create a synthetic key currency to replace the United States dollar.
Governor Kuroda has high expectations for the future, however. Digital currency is electronic data that holds proprietary value and enables low-cost financial services, such as money transfer using smartphones.
He said: “The world is going increasingly cashless. The currencies of central banks could certainly become not only paper money, but also digital currencies. One could make the argument that it would make [the money market] more efficient.”
In addition to the BoJ and the ECB, the central banks of the United Kingdom, Switzerland, Canada, and Sweden make up the six banks involved in joint research. Discussions are underway on measures to address drain and data loss from cyber attacks, as well as impacts on private financial institutions. A report will be compiled within 2020, he said.
Nonetheless, the prevalence of ATMs and traditional, deep-seated demand for cash in Japan have created a difficult climate for digital currency to gain momentum.
Digital Challenges to the U.S. Dollar
Kuroda explained that of the six central banks, only Sweden has plans to issue legal digital currency. The other banks remain uncommitted. The agreement among the six central banks is limited to “an in-depth objective investigation of the issue,” he continued.
Kuroda pointed out the sense of urgency among the six banks surrounding China’s aim to issue the “Digital Renminbi.” In an ongoing power struggle with the U.S., China has focused its efforts on overthrowing the international monetary system based on the dollar as key currency by propagating a China-led payment system using leading-edge IT technology.
Yet Kuroda rejects such concerns, noting, “Just because the Renminbi goes digital does not mean that it will replace the U.S. dollar as an international currency.”
Noting that the U.S. dollar only replaced the British pound as a key currency 40 years after the U.S. became the world’s largest economic power, Kuroda is of the opinion that, even if China surpasses the U.S. in the future in terms of economic scale, “currency is a different matter.”
It is not only China that is questioning the supremacy of the U.S. dollar. In August 2019, Governor Mark Carney of the Bank of England proposed the creation of a synthetic digital currency with value based on multiple major currencies to replace the dollar. Under his proposal, the synthetic currency would be managed by various countries as a key currency.
Governor Kuroda deemed the idea “an interesting option for an international monetary system that does not depend on the currency of just one country.” However, he pointed out that very few countries support the idea. When asked if the six central banks, including the Bank of England, would create a synthetic key currency, he declared, “That most certainly will not happen.”
Author: The Sankei Shimbun