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Suda Says Europe's Sovereign-Debt Crisis Increasing Economic Uncertainty

Bank of Japan board member Miyako Suda said uncertainty over the economic outlook has risen because of Europe’s deepening sovereign-debt crisis.

“Uncertainty has risen and I’m paying more attention to downside risks,” Suda said in a speech in Wakayama, western Japan today. Globally, “stock and currency markets are increasingly unstable, which could lead to a deterioration in corporate and household sentiment, hurting capital and consumer spending not only in Europe but Japan as well.”

Suda is the first board member to voice caution about the outlook since the bank raised its economic assessment last month, saying the expansion is become sustainable. Data in the past week showed capital spending tumbling, deflation deepening and unemployment rising and Europe’s fiscal woes have contributed to a 6.6 percent drop in the Nikkei 225 Stock Average this year.

“Suda, often regarded as a hawkish member of the board, has clearly acknowledged she’s more aware of the downside risks,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. As recently as March, she had said that upside and downside risks for growth were balanced.

The Nikkei rose 3.2 percent today, rebounding from a slide spurred by Prime Minister Yukio Hatoyama’s resignation yesterday.

Suda also said the central bank will continue to maintain an “extremely accommodative financial environment” because beating deflation is a “critical challenge.”

She said overheating in China and other emerging countries and a decline of growth expectations among companies in Japan also pose risks the nation’s recovery, which she said will probably be moderate.

Spur Growth

Bank of Japan Governor Masaaki Shirakawa last month said the bank plans to provide one-year loans at the same rate as the 0.1 percent key overnight lending rate to encourage lending in areas that would spur growth.

The central bank has faced pressure to fight deflation from the government, whose ability to spur the economy is constrained by record public debt. Finance Minister Naoto Kan, who yesterday said he will run to replace Hatoyama, has been urging the bank to adopt an inflation target. Suda said expanding fiscal spending would hurt the economy in the longer run and discourage consumption.

“Should trust in fiscal policy deteriorate, debt-servicing costs will increase because of higher yields,” Suda said. That will “also hurt the balance sheets of financial institutions, increasing the downward pressure on the economy,” she said.

Speaking at a press conference, Suda called on the government to come up with “solid” plans to manage the country’s fiscal health over the long term as well as prop up economic growth. The government is scheduled to outline its strategy to address those issues this month.

Failure to come up with a concrete roadmap may hurt the government’s credibility and further depress growth expectations among Japanese businesses and households, she said. The remarks were in response to a question about what she expects from the new administration.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

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