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BOJ Should Buy Government Bonds to Ease Yen Gain, Merrill's Kichikawa Says

The Bank of Japan needs to do more to curb the yen’s advance by increasing its purchases of government bonds with longer maturities, according to Merrill Lynch Japan Securities Co.

“Currency intervention isn’t the leading player in halting the yen’s gain -- monetary policy is the only way to go,” Masayuki Kichikawa, chief economist at Merrill Lynch in Tokyo, said in an interview yesterday. He said the central bank should buy between 20 trillion yen ($245 billion) and 25 trillion yen in 10-year and 20-year government bonds, which would lower long- term borrowing costs and help stoke inflationary expectations.

The Japanese currency is approaching a postwar record of 79.75 against the dollar, threatening the nation’s export-led recovery. Efforts by the Finance Ministry to halt the yen’s gains with more than 2 trillion yen of currency intervention and the Bank of Japan’s credit easing have been unsuccessful, with the currency gaining 5 percent since authorities sold the yen on Sept. 15.

Should the yen rise to between 70 and 75 against the dollar and increase deflationary pressure, that could force companies to shift production abroad and cut jobs and business investment, Kichikawa said. “It’s very important for Japanese authorities to take measures to stabilize the yen between 85 and 90.”

The central bank this month created a 5 trillion-yen fund to buy government debt and other assets. Governor Masaaki Shirakawa has said that the bank may consider expanding the fund when it explores additional policy easing. The central bank also buys 21.6 trillion yen of government debt per year from lenders, including 1.2 trillion yen in bonds with maturities of more than 10 years and up to 30 years.

Widen Rate Gap

Buying debt with longer maturities would also help widen the interest-rate gap between American and Japanese borrowing costs, easing pressure on the yen, Kichikawa said. Shirakawa has said that the central bank purchases aren’t intended to finance government spending and keep long-term yields low. The bank said this month its fund will buy government bonds with a remaining maturity of about one to two years.

The yen traded at 81.65 against the dollar at 2:02 p.m. in Tokyo, after reaching to a 15-year high of 80.41 on Oct. 25 and has gained 14 percent versus the U.S. currency this year.

A 10 percent surge in the yen would shave between 0.5 percentage point to 0.6 percentage point from Japan’s gross domestic product, Kichikawa said. He forecasts the economy will grow 2 percent in the year ending March 31 and 1.6 percent the following fiscal year.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

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