BOJ Must Monitor Negative Effects of Strong Yen, Shirakawa Says

The Bank of Japan (8301) needs to monitor more carefully negative effects of a strong yen on the economy amid global uncertainty, Governor Masaaki Shirakawa said.

“The stronger yen causes a decline in exports and corporate profits as well as deterioration in business sentiment,” Shirakawa said at an economic forum in Tokyo today. “The negative effect is dominant.”

The yen has advanced almost 45 percent against the dollar in the past five years, eroding the profits of exporters including Sony Corp. (6758) and Toyota Motor Corp. (7203) Shirakawa reiterated today that purchases of foreign bonds, urged by lawmakers to weaken the currency and counter deflation, are outside of the central bank’s ambit.

The yen was at 78.42 per dollar as of 3:45 p.m. in Tokyo, about 4 percent from its postwar high.

Deceleration in overseas economies has continued for longer than expected and has caused Japanese exports and industrial production to be “somewhat weak,” Shirakawa said.

The slowing is “mainly due to the European debt problem” that caused a decline in firms’ and households’ confidence and a slowdown in the real economy, he said. This European situation is a “headwind” for the U.S. economy and its influence on Chinese exports requires attention.

Foreign Bonds

Shirakawa said that foreign bond purchases by the central bank aimed at weakening the yen are “identical” to intervention in foreign exchange markets, which is the purview of the government.

Japan’s ruling party yesterday proposed that the central bank purchase foreign bonds to weaken the yen and fight deflation. The main opposition party also suggested the same thing last week. More than a decade of falling prices have sapped the economy’s momentum, with an inflation report last week showing that the declines accelerated in July.

A ruling party committee called today for the bank to set a 2 percent inflation goal and purchase 10 trillion yen ($12.7 billion) in foreign bonds. BOJ board member Ryuzo Miyao yesterday said that foreign bond purchases are the finance minister’s responsibility.

The Finance Ministry should exclusively conduct currency intervention, Finance Minister Jun Azumi said in parliament last month, adding that it was inappropriate for the bank to engage in intervention-style bond buying.

Takehiro Sato, a former economist at Morgan Stanley who joined the BOJ board in July, said July 24 that buying foreign bonds is one option for the central bank. Takahide Kiuchi, a fellow newcomer to the board, said the same day that the bank may need to consider “new forms of monetary easing.”

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

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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