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BOJ Flags ‘Downside’ Risks for Economy as Yen Rises

Masaaki Shirakawa, governor of the Bank of Japan
Masaaki Shirakawa, governor of the Bank of Japan. Photographer: Kimimasa Mayama/Bloomberg

Top Bank of Japan officials flagged rising risks to the nation’s growth as the yen climbed in the aftermath of the U.S. Federal Reserve signaling willingness to consider more monetary stimulus.

“We’re entering a situation where we need to pay more attention to downside risks,” board member Ryuzo Miyao said in a speech in Tokushima, western Japan, today. Governor Masaaki Shirakawa said that the central bank needs to monitor risks to Japan’s economy, exports, and corporate profitability, the Yomiuri newspaper reported, citing an interview.

The remarks came a week after Japan sold yen for the first time in six years in response to a strengthening currency that threatened to derail the economy’s recovery. The BOJ may be pressured to consider further liquidity injections after the government’s decision to intervene and the Fed’s signal it may ease more, said economist Yoshimasa Maruyama.

“The chance of additional easing by the BOJ is definitely mounting as Miyao flagged concern about the yen’s effect and Governor Shirakawa underlined the cooperation with the government,” said Maruyama, a senior economist at Itochu Corp. “It’s possible for the BOJ to act as early as next month, at either the first or the second meeting.”

The BOJ policy board is scheduled to meet twice next month, for a two-day conference October 4-5 and on October 28.

‘Protracted’ Risk

“There is a growing risk that the U.S. economy may fall into a period of low growth that could be a bit protracted,” Miyao said today. “From a longer perspective, for instance, one or two or three years, there’s a risk that the level of growth could be lower than expected,” he said at a later news conference.

Shirakawa said that Japan’s currency-market intervention last week was appropriate, the Yomiuri newspaper reported. The central bank must monitor ”more carefully than before” the risk that the yen’s gain would hurt exports and corporate profits, he was quoted as saying.

Japan’s currency rose 0.2 percent to 84.94 per dollar at 3:40 p.m. in Tokyo. It gained 0.7 percent yesterday following the Fed’s statement, the most since Japan sold the yen on Sept. 15. A surge to the highest level in 15 years earlier this month prompted Prime Minister Naoto Kan’s government to abandon a six-year practice of avoiding currency intervention.

Bonds Rise

Government bonds advanced for a second day as the Fed’s statement spurred speculation the yen will continue strengthening and hurt company profits. The yield on the benchmark 10-year bond was down 1.5 basis points to 1.03 percent as of 1:54 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker.

Kan said Japan should put in place economic and monetary policies to weaken the yen, the Financial Times reported today, citing an interview.

The Federal Open Market Committee said yesterday it “will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Intervention Skepticism

Some analysts are skeptical about whether intervention will be able to keep the Japanese currency down for long.

“The latest intervention won’t change the market trend,” Eisuke Sakakibara, a former top Finance Ministry official, said in an interview in Tokyo yesterday. The currency’s climb to a record is “just a matter of time,” he said, predicting it will hit an all-time high this year.

In the run-up to Japan’s yen sales last week, local corporate executives urged the government to take action against the advancing yen, which makes exports more costly.

“We expect the yen to stay strong, unfortunately --single country intervention has only limited impact.” said Yasuchika Hasegawa, president of Takeda Pharmaceutical Co., in an interview in Tokyo today.

Slower Growth

Growth in exports decelerated to 23.5 percent in July, its slowest pace this year. The overall economy grew at a 1.5 percent annual rate in the second quarter, less than half the pace of the previous period.

Japan’s central bank has kept its policy target rate at 0.1 percent since December 2008. It expanded a credit program for lenders by 10 trillion yen ($118 billion) to 30 trillion yen at an emergency board meeting on Aug. 30.

The central bank has refrained from removing funds in the financial system after last week’s intervention, leaving deposits held by lenders at the bank at near the highest level this month.

Miyao said the central bank will use various funds, including money from the intervention to provide liquidity. The bank will continue “strong monetary easing,” he said.

If it chooses to loosen credit further, the central bank will probably first consider expanding the credit program and putting more money in a 3 trillion yen fund aimed at getting banks to lend more, said Mari Iwashita, chief market economist at Nikko Cordial Securities in Tokyo.

Rate Cut

Other options may include lowering the benchmark rate, increasing a monthly government bond purchases from 1.8 trillion yen and adopting an inflation target, Iwashita said. The bank will be more reluctant to adopt those steps, she said.

If keeping intervention funds in the market makes it difficult for the bank to hold the key rate at 0.1 percent, the bank may lower its target for the key rate to a range between zero percent and 0.1 percent, Iwashita said.

Miyao said the central bank won’t rule out any policy options, including increasing its bond purchases.

“We’ll examine the effects and side-effects of all available options and we’ll make an appropriate response,” he said.

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