Bank of Japan Governor Masaaki Shirakawa said he’s “committed” to continuing monetary easing and the Japanese economy has “stagnated,” even as a report Thursday showed the fastest export growth in a year.

“The Bank of Japan is fully committed to continuing powerful monetary easing through various measures, including maintaining the policy interest rate at practically zero and purchasing financial assets, until the current goal of year-on- year CPI inflation at 1 percent is deemed to be achievable,” Shirakawa said in a speech in New York late Wednesday.

Prime Minister Yoshihiko Noda’s government faces the challenge of sustaining the nation’s economic recovery once this year’s boost from earthquake reconstruction work wears off. The yen’s decline against the dollar after the Bank of Japan boosted monetary stimulus in February aided exporters after the currency rose to a post World War II record last year.

Japan reported Thursday a smaller-than-expected trade deficit, boosting prospects that the recovery in the world’s third- biggest economy will be sustained. Outbound shipments rose 5.9 percent in March from a year earlier, exceeding the median estimate in a Bloomberg News survey for a gain of 0.2 percent. Comparisons are distorted by the earthquake in March, 2011.

“The Japanese economy has stagnated and the rate of growth is sub-par among the major economies,” Shirakawa said. “The low aggregate growth and the huge fiscal hole are both largely the symptoms of the failure to adapt to the demographic reality. The modest deflation is, in turn, largely attributable to the lower growth outlook impacting expected future income and hence current spending.”

Morgan Stanley MUFG Securities Co., Mizuho Securities Co. and SMBC Nikko Securities Inc. predict that the BOJ will expand asset purchases at a meeting on April 27 amid pressure from lawmakers for more aggressive action to counter decade-long deflation. In February, the central bank set an inflation goal of 1 percent, expanded asset purchases by 10 trillion yen ($123 billion) and pledged to pursue powerful easing.

“Considering that the Japanese financial conditions are probably the most expansionary among developed economies, the failure of Japan to shake off modest deflation can mostly be explained by its deteriorating growth potential,” Shirakawa said. “In this sense, if the Japanese economy is to extricate itself from deflation and return to a path of sustainable growth under price stability, it requires both policies aimed at enhancing growth potential and supporting monetary stimuli.’

Central banks cannot “reasonably” deliver solutions to structural issues, he added. 

(Bloomberg)