Shirakawa Signals Japan Recovery Withstanding Yen’s Advance

Masaaki Shirakawa, governor of the Bank of Japan
Masaaki Shirakawa, governor of the Bank of Japan, speaks during a news conference at the central bank's headquarters in Tokyo. Photographer: Tomohiro Ohsumi/Bloomberg

Bank of Japan Governor Masaaki Shirakawa indicated the nation’s recovery has been resilient to the yen’s advance, supporting his board’s decision to keep policy unchanged today.

“We are well aware that the yen’s strength is a downside risk for corporate sentiment,” Shirakawa told reporters after the bank kept the benchmark rate at 0.1 percent and maintained the current size of its credit programs for lenders at a meeting in Tokyo today. “On the other hand, we have to assess the currency’s effect on the economy in a well-balanced manner.”

Shirakawa said the discussion of the yen, which is approaching a 15-year high against the dollar, dominated today’s meeting because of the risk it poses to exporters and the economy. While the appreciation can erode profits of companies fueling the recovery, Japan is also one of the few countries whose imports to China accelerated in July, data today showed.

“The BOJ won’t ease policy further unless there’s a risk the rising yen will push the economy back into a recession,” said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. “That means the BOJ won’t undertake monetary policy aimed at correcting currency levels.”

The governor said corporate profits have improved and the global economy is in better shape now than it was in November, when the yen reached a 14-year high of 84.83. The yen traded at 85.70 per dollar at 6:03 p.m. in Tokyo. It advanced to an eight-month high of 85.02 on Aug. 6.

Lower Yields

Financial conditions are also more accommodative, Shirakawa said. The yield on the benchmark 10-year bond slid to a seven-year low last week, enhancing easy lending conditions, he said.

The central bank may be compelled to move should uncertainty about the global economy unsettle currency markets, according to economist Yoshiki Shinke. Japan’s currency typically rises when investors become more averse to taking on risk.

“The bank hasn’t changed its view of the economy so it isn’t considering easing policy now,” said Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “But market conditions may not allow them to stand pat” if the U.S. central bank eases policy, putting pressure on the yen, he said.

Exporters from Sony Corp. to Toyota Motor Corp. have raised profit projections on robust demand from emerging economies. At the same time, executives also say they are worried about the currency.

Impact of Yen

Toshiyuki Shiga, chief operating officer at Nissan Motor Co., Japan’s third-biggest automaker, said last week he’s “very concerned” about the yen’s strength. Toyota, which lifted its full-year net income projection to 340 billion yen, said a one-yen appreciation against the dollar cuts its annual operating profit by 30 billion yen ($350 million).

The bank’s decision, which was unanimous, was expected by 16 of 17 economists surveyed by Bloomberg News.

Finance Minister Yoshihiko Noda has become more vocal about the yen’s advance, a sign of the government’s growing concern about the currency. He said today that movements have been “one sided” and “excessive” moves can hurt the economy.

BOJ policy makers didn’t mention the yen in their statement, where they also kept their assessment of the economy unchanged. While the government today also maintained its view of Japan’s economy, the world’s second largest, it cut its evaluation of China’s outlook for the first time in 18 months, citing cooling demand.

Balanced Risk

Shirakawa said he hasn’t changed his view that upside and downside economic risks are almost balanced. The bank expects a sustained rebound as a pickup in exports spreads to domestic demand, he said.

The yen’s gains have also come at a time when data indicates the nation’s recovery is waning. Industrial production fell the most in 16 months in June, and the unemployment rate climbed to a seven-month high. A report yesterday showed the current-account surplus narrowed for a second month as exports grew at a slower pace.

The bank probably kept policy unchanged because it wants to see what steps the U.S. Federal Reserve will take when policy makers meet later today, according to analyst Hirokata Kusaba. Easing by the Fed may exacerbate the yen’s advance and put pressure on the BOJ, he said.

The outcome of the Fed meeting “may add to the risk of further appreciation in the yen,” said Kusaba, a senior economist in Tokyo at Mizuho Research Institute Ltd. “If the yen rallies toward the 80 yen mark versus the dollar, the bank may bear the brunt of criticism for no action.”

Emergency Action

Market volatility and political pressure caused the bank to move by convening an emergency meeting on Dec. 1, four days after the yen surged to its strongest since 1995 and prompted then Deputy Prime Minister Naoto Kan to call for policy action. It unveiled a fixed-rate credit program for banks that was doubled to 20 trillion yen in March.

Still, some economists say central bank measures may not be effective to stem the yen’s advance because the currency’s gains have been driven by uncertainty about the global economy.

“With Japan’s economic recovery still very fragile, we need to consider the effectiveness of monetary easing in conjunction with foreign exchange rates,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. “Traders are buying up the yen even though the Japanese economy’s still weak, which means the central bank’s easy policies aren’t really working.”

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