Bank of Japan board member Hidetoshi Kamezaki highlighted economic risks of a rising yen and said the bank will act proactively to combat deflation, a more aggressive stance than his colleagues have indicated.
“We want to make utmost efforts proactively to escape from deflation and return to a sustainable growth path under price stability,” Kamezaki said in a speech today in Sapporo, northern Japan. He said a weaker euro and stronger yen could hurt exporters, who have driven the economic recovery.
Kamezaki’s remarks on the yen set him apart from Governor Masaaki Shirakawa and his deputy Hirohide Yamaguchi, who refrained from singling out the currency’s appreciation as a downside risk in public remarks earlier this month. Steeper yen gains could be a trigger for monetary easing, said economist Hiroshi Shiraishi.
“Even though Japan’s economy is recovering, the BOJ may need to keep the current extremely accommodative monetary stance to ease rising pressure on the yen,” Shiraishi, an economist at BNP Paribas in Tokyo, said before the speech. The BOJ might consider providing “longer-term liquidity” should the currency rise abruptly, he said.
The yen has climbed 6.9 percent against the dollar and 8.3 percent per euro in the past three months as concern over a slowdown in the U.S. and Europe boosted demand for the currency as a refuge. It traded at 88.00 per dollar at 4:12 p.m. in Tokyo and 114.72 versus the euro, having weakened against those currencies by more than 1 percent over the past two days.
“We need to recognize the impact of the weaker euro and stronger yen on the competitiveness of exporters and the impact of instability of financial markets on companies’ fund-raising activities as downside risks to the economy,” Kamezaki said.
The 67-year-old former trading company executive said Japan’s exports will likely continue to increase, though at a more moderate pace. Echoing recent remarks by Shirakawa and Yamaguchi, Kamezaki said he also sees upside risks to Japan’s recovery, including faster growth in emerging economies.
At a news conference after the speech, Kamezaki said a rising yen could hurt exports in the short term and as well as affect business investment and consumer spending. Still, he said there’s no need to change the bank’s recovery outlook as the world economy is rebounding and corporate profits are improving.
“There could be some impact from a higher yen, but we won’t change our scenario that the economy will recover,” he told reporters, while adding that the pace of the expansion is likely to slow in the fourth quarter.
Kamezaki also called for the BOJ to act “proactively” in his previous speech in March. Other BOJ officials have stopped short of using similar language when discussing what is needed to overcome falling prices. Shirakawa said this month that the central bank will maintain an “extremely accommodative” monetary policy to fight deflation.
The economy has still yet to achieve a self-sustaining rebound in private domestic demand, Kamezaki said today, adding that a narrower gap between supply and demand is needed to overcome deflation. Consumer prices excluding fresh food probably fell for a 16th month in June, according to the median estimate of economists surveyed before figures due July 30.
As well as erode exporters’ profits, gains in the yen can add to deflationary pressure by lowering the cost of imports. Kamezaki said prices may resume rising next fiscal year, echoing the consensus among the policy board.
The BOJ introduced a fixed-rate lending facility last December after the yen touched a 14-year high of 84.83 against the dollar and stocks plunged. The program was doubled to 20 trillion yen in March. The central bank has kept the benchmark interest rate at 0.1 percent since lowering it in December 2008.