MATSUMOTO, Japan, July 20 (Reuters) - The Bank of Japan will
act flexibly and decisively with an eye on how rises in the yen,
among other factors, are affecting the economy, a deputy BOJ
governor said, signalling the bank's readiness to ease monetary
policy further if the country's recovery comes under threat.
Hirohide Yamaguchi, one of the BOJ's two deputy governors,
stuck to the central bank's view that the Japanese economy will
resume a moderate recovery in October-March, the second half of
the current fiscal year.
But he warned of risks to the outlook such as slowing global
economic growth and Europe's sovereign debt problems, which
could hurt Japan by triggering a fall in share prices and a rise
in the yen as investors distance themselves from risk.
"Strong uncertainty exists on the global and Japanese
economies," Yamaguchi said on Wednesday in a speech to business
leaders in Matsumoto, in northwestern Japan.
"We will take flexible and decisive action when needed by
closely examining economic and price developments, including how
they are affected by exchange-rate moves," he said.
Yamaguchi's comments were stronger than the BOJ's recent
official line on monetary policy, that the central bank would
take appropriate action when needed, and underscored the bank's
growing alarm over the yen's recent rise.
Authorities stepped up their warnings about yen rises after
the dollar hit a four-month low of 78.45 yen last week.
It was around 79 yen on Wednesday.
Finance Minister Yoshihiko Noda kept up the tough talk on
currencies on Wednesday in response to questions from worried
lawmakers in parliament.
"There is no change in the government's stance that we are
prepared to take decisive measures on currencies if needed to
respond to disorderly moves," Noda said.
Despite the warning, many traders say the authorities are
unlikely to intervene in the market because moves are being
driven by factors beyond Japan's control, such as Europe's debt
woes.
PERSISTENT DEFLATION
That puts pressure on the BOJ to loosen monetary policy
further in the hope of pushing down bond yields and stemming yen
rises that could hurt Japan's export-reliant economy.
"If Japan were to do something on currencies they would have
to act alone this time, and may not have the firepower to move
the market," said Norio Miyagawa, a senior economist at Mizuho
Securities Research & Consulting.
"It is more about instilling doubt in the market at the
right time. For the BOJ, the easiest options would be expanding
fixed-rate lending operations or buying more JGBs."
The BOJ eased policy just days after the devastating
earthquake in March by topping up a pool of funds to buy assets
ranging from government bonds to private debt.
It has kept monetary policy on hold since then and raised
its assessment of the economy last week, encouraged by a rebound
in factory output.
But the global economic slowdown and recent yen strength are
clouding the outlook, threatening to hurt exports just as
Japanese companies restore supply chains damaged by the quake.
Central bank officials concede that a renewed yen spike
accompanied by sharp falls in share prices would be the most
likely next trigger for further easing, as such market moves
would damage a still fragile recovery in business sentiment.
But analysts doubt whether BOJ easing would have a lasting
impact on markets. The IMF said in a report that the BOJ's
monetary policy had a modest effect on government bond yields
but no significant impact on the yen.
Still, the BOJ has expressed its readiness to act if its
forecast of a moderate economic recovery comes under threat. If
yen rises persist, it may ease as early as its next rate review
on Aug. 4-5, some analysts say.
Yamaguchi said recent yen rises have yet to directly hit
capital spending or prompt companies to shift production abroad,
but added that the BOJ would watch for any signs of such effects
emerging in the future.
Companies, however, may already be feeling the pain.
The dollar is now 3 yen below the 82.59 yen rate on which
big manufacturers have based their earnings forecasts for the
current fiscal year, according to the BOJ's tankan survey.
Japan Iron and Steel Federation Chairman Eiji Hayashida said
on Wednesday that very few manufacturing companies can stay
profitable with the yen above 80 to the dollar.
Yamaguchi also warned that it would take more time for Japan
to achieve a sustainable exit from deflation as a base-year
revision to the consumer price index in August would push down
price growth to near zero, below the 1 percent considered
desirable by the BOJ.
The BOJ has pledged to keep interest rates virtually at zero
until consumer inflation of 1 percent is in sight. It is now
forecasting that core CPI will rise 0.7 percent in both the
current fiscal year and next year.
By Leika Kihara
Source: www.reuters.com
act flexibly and decisively with an eye on how rises in the yen,
among other factors, are affecting the economy, a deputy BOJ
governor said, signalling the bank's readiness to ease monetary
policy further if the country's recovery comes under threat.
Hirohide Yamaguchi, one of the BOJ's two deputy governors,
stuck to the central bank's view that the Japanese economy will
resume a moderate recovery in October-March, the second half of
the current fiscal year.
But he warned of risks to the outlook such as slowing global
economic growth and Europe's sovereign debt problems, which
could hurt Japan by triggering a fall in share prices and a rise
in the yen as investors distance themselves from risk.
"Strong uncertainty exists on the global and Japanese
economies," Yamaguchi said on Wednesday in a speech to business
leaders in Matsumoto, in northwestern Japan.
"We will take flexible and decisive action when needed by
closely examining economic and price developments, including how
they are affected by exchange-rate moves," he said.
Yamaguchi's comments were stronger than the BOJ's recent
official line on monetary policy, that the central bank would
take appropriate action when needed, and underscored the bank's
growing alarm over the yen's recent rise.
Authorities stepped up their warnings about yen rises after
the dollar hit a four-month low of 78.45 yen last week.
It was around 79 yen on Wednesday.
Finance Minister Yoshihiko Noda kept up the tough talk on
currencies on Wednesday in response to questions from worried
lawmakers in parliament.
"There is no change in the government's stance that we are
prepared to take decisive measures on currencies if needed to
respond to disorderly moves," Noda said.
Despite the warning, many traders say the authorities are
unlikely to intervene in the market because moves are being
driven by factors beyond Japan's control, such as Europe's debt
woes.
PERSISTENT DEFLATION
That puts pressure on the BOJ to loosen monetary policy
further in the hope of pushing down bond yields and stemming yen
rises that could hurt Japan's export-reliant economy.
"If Japan were to do something on currencies they would have
to act alone this time, and may not have the firepower to move
the market," said Norio Miyagawa, a senior economist at Mizuho
Securities Research & Consulting.
"It is more about instilling doubt in the market at the
right time. For the BOJ, the easiest options would be expanding
fixed-rate lending operations or buying more JGBs."
The BOJ eased policy just days after the devastating
earthquake in March by topping up a pool of funds to buy assets
ranging from government bonds to private debt.
It has kept monetary policy on hold since then and raised
its assessment of the economy last week, encouraged by a rebound
in factory output.
But the global economic slowdown and recent yen strength are
clouding the outlook, threatening to hurt exports just as
Japanese companies restore supply chains damaged by the quake.
Central bank officials concede that a renewed yen spike
accompanied by sharp falls in share prices would be the most
likely next trigger for further easing, as such market moves
would damage a still fragile recovery in business sentiment.
But analysts doubt whether BOJ easing would have a lasting
impact on markets. The IMF said in a report that the BOJ's
monetary policy had a modest effect on government bond yields
but no significant impact on the yen.
Still, the BOJ has expressed its readiness to act if its
forecast of a moderate economic recovery comes under threat. If
yen rises persist, it may ease as early as its next rate review
on Aug. 4-5, some analysts say.
Yamaguchi said recent yen rises have yet to directly hit
capital spending or prompt companies to shift production abroad,
but added that the BOJ would watch for any signs of such effects
emerging in the future.
Companies, however, may already be feeling the pain.
The dollar is now 3 yen below the 82.59 yen rate on which
big manufacturers have based their earnings forecasts for the
current fiscal year, according to the BOJ's tankan survey.
Japan Iron and Steel Federation Chairman Eiji Hayashida said
on Wednesday that very few manufacturing companies can stay
profitable with the yen above 80 to the dollar.
Yamaguchi also warned that it would take more time for Japan
to achieve a sustainable exit from deflation as a base-year
revision to the consumer price index in August would push down
price growth to near zero, below the 1 percent considered
desirable by the BOJ.
The BOJ has pledged to keep interest rates virtually at zero
until consumer inflation of 1 percent is in sight. It is now
forecasting that core CPI will rise 0.7 percent in both the
current fiscal year and next year.
By Leika Kihara
Source: www.reuters.com
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