Bank of Japan Governor Toshihiko Fukui said on Monday that Japan's economy was gradually gaining momentum but that sustained growth was not yet ensured. "Now the Japanese economy is finally reaching the end of the long and painful path of post-bubble adjustments," Fukui said in the text of a speech to a BOJ conference, referring to the asset-inflation period of the late 1980s and early 1990s. "(The economy) is gradually gaining momentum for the restoration of sustained growth, and is showing more signs of recovery." The comments come after the BOJ's June "tankan" corporate sentiment survey released last week showed sentiment among big manufacturers at its highest level since August 1991, while confidence among smaller firms and non-manufacturers was also brighter. Japan's economy has shown above six percent real annualised growth for two straight quarters. "Yet we should remain vigilant," Fukui said. "We cannot say for sure that the current recovery will be durable and strong enough to push the economy back to a sustained growth path." Fukui also noted that banks' lending attitudes were improving, showing that they have made progress in solving their non-performing loans.
"Well-functioning financial systems are important in achieving sustained economic growth," he said. Fukui also highlighted the challenges of monetary policy under a low inflation environment. Japan has been battling deflation for more than five years. Fukui said that setting a specific price target was not necessarily effective in achieving price stability. With a strengthening economy, there is growing debate over how the central bank should conduct policy after it ends its current "quantitative easing" framework of flooding the markets with liquidity to keep short-term interest rates near zero. It has pledged to keep the policy until inflation materialises. Some government officials and politicians have called on the central bank to adopt a price, or inflation, target to conduct monetary policy. "Japan's experience suggests the importance of assessing the sustainability of price stability over a fairly long period, which many central banks have emphasised in recent years," Fukui said. "This implies that 'price stability' does not always correspond to the achievement of a specific rate of inflation in terms of a specific price index within a specific time horizon." Fukui and other top BOJ officials have expressed caution about adopting a price target as it would limit the BOJ's monetary policy options.///