The current developments in asset markets do not reflect "excessively bullish expectations", Bank of Japan Governor Haruhiko Kuroda said in a speech in Tokyo on Sunday.
If a rise in asset prices is a reflection of the policy effects or improved outlook for the real economy, it will only have positive effects on the real economy, he noted. His comments came after the yield on Japanese benchmark 10-year bonds rose to 1 percent last week.
Speaking to the Japan Society of Monetary Economics, the central bank chief said the financial system in Japan seems to "possess sufficient resilience" against a rise in interest rates by around 1-3 percentage points.
As long as the increase in rate is accompanied by improved developments in economic activity, there are no major concerns over possible instability.
He encouraged financial institutions to lend more to small and medium sized firms. "The process to overcome deflation is also the process for the financial system to recover its vigor."
Kuroda called on households to diversify their selection of assets other than deposits in terms of the portfolio re-balancing. Now some financial institutions have refocused on sales of financial products to individual customers.
Further, Kuroda reiterated his pledge to overcome deflation with monetary easing measures. The massive purchases of bonds will reduce yields, while the reverse may happen in an improving economy, he observed.
It is not easy to exit from deflation which has lasted for 15 years, Kuroda said. "But it is possible to realize the 2 percent price stability target and, if we cannot realize it, the credibility of the central bank will not be restored."
He said the economy is picking up and it is expected to return to a moderate recovery path around mid-2013.
Kuroda urged the government to continue its efforts to contain huge public debt. It is important for the government to steadily proceed with fiscal structural reforms to prevent concerns over fiscal sustainability.
Kuroda on April 4 unveiled an aggressive monetary easing, a plan to double monetary base in two years, and the holdings of Japanese Government Bonds.
The minutes of the board meeting held on April 26, released today, showed that members intend to continue with the easing until inflation reaches the desired target of 2 percent.
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