By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda on Wednesday stressed that he won't pull the plug on monetary easing until inflation hits his 2 percent target, warning that escalating international trade disputes could inflict widespread damage to global growth.
Yet, reinforcing premier Shinzo Abe's comments last week and laying the grounds for a future exit from ultra-loose monetary policy, Kuroda said no central bank wants to continue with unconventional monetary easing forever.
"If we achieve our 2 percent inflation target, there's no need to continue with our massive monetary easing, so we'll obviously head toward an exit. But that doesn't mean we should not continue monetary easing now," Kuroda told a briefing.
"No central bank wants to tighten or ease policy indefinitely. Any central bank obviously would want to achieve its target as soon as possible and normalize policy."
The remarks, which came after the BOJ's widely expected decision to keep policy steady, underscore the dilemma the bank faces as risks to the export-reliant economy and soft inflation force it to maintain a radical stimulus despite the rising cost of prolonged easing.
Major central banks, including the BOJ, have been put in a tricky position as a deepening tariff row between the United States and China threatens to unsettle asset markets, disrupt supply chains and undermine their economies and policies.
Beijing on Tuesday added $60 billion of U.S. products to its import tariff list in swift retaliation against U.S. President Donald Trump's planned levies on $200 billion of Chinese goods.
Data released earlier on Wednesday showed Japan's exports rose 6.6 percent in August from a year earlier on firm U.S-bound shipments, beating market forecasts and exceeding a 3.9 percent gain in July in a sign many firms remain unscathed by the trade frictions for now.
But Kuroda warned against complacency, saying that complex global supply chains mean tit-for-tat tariff retaliations could have unintended consequences beyond U.S.-Chinese trade.
"Protectionism could affect not only the countries that are engaged (in trade wars) but the global economy as a whole through supply chains," he said. "We're watching developments with grave concern."
A slowdown in external demand would add to headaches for the BOJ, which has failed to hit its 2 percent target despite years of heavy asset purchases.
While pointing to trade frictions as among risks to growth, Kuroda said they were not big enough to alter the BOJ's conviction that the economy will continue to expand moderately.
He also said the BOJ is mindful of the rising cost of its easy policy, such as the damage to bank profits, though that would not prompt the central bank to withdraw stimulus before its price target is met.
ABE'S SIGNAL CHANGE
Years of ultra-low rates have dried up bond market liquidity and strained bank profits, inflaming concerns even within the BOJ over the rising cost of its stimulus program.
Responding to such concerns, the BOJ took steps in July to make its policy framework more sustainable such as allowing bond yields to move more flexibly around its zero percent target.
Wednesday's BOJ meeting came ahead of a ruling party leadership race on Thursday, which Abe looks set to win and put him on track to become Japan's longest-serving premier.
While few analysts expect the central bank to immediately dial back stimulus, politicians have sent signals that they are becoming more amenable to the idea of a future exit from easy policy.
Abe said last week the BOJ's ultra-easy policy should not last forever, signaling his hope of laying the path toward an exit from a radical stimulus program.
Kuroda declined to respond to Abe's comment, but said there was no gap in view between the central bank and the government on the need to continue efforts to break Japan out of deflation.
"We are maintaining our monetary easing taking into account the impact on the financial system," as well as problems that could arise from the BOJ's huge asset buying, Kuroda said.
"But that doesn't mean we should stop monetary easing now."