Nishimura Says Yen’s Gains May Pressure Sentiment

Bank of Japan Deputy Governor Kiyohiko Nishimura said the stronger yen may erode corporate sentiment and push down consumer prices, exacerbating deflation and weighing on the economic expansion.

“The fact that the recent appreciation of the yen is deteriorating business sentiment” is a “big factor in putting downward pressure on economic activity,” Nishimura said today in a speech in Hiroshima, western Japan. “There is a risk that the yen’s appreciation will lower consumer prices not only through worsening economic activity but also through changes in import prices.”

Nishimura also said the central bank will continue to pursue “strong” monetary policy measures and stands ready to take appropriate monetary action. Governor Masaaki Shirakawa and his other deputy Hirohide Yamaguchi have already signaled the central bank is ready to ease policy further if necessary by expanding a 5 trillion-yen fund ($61 billion) created earlier this month.

The Bank of Japan this month pledged to keep its benchmark interest rate at “virtually zero” until deflation has ended and decided to create an asset-purchase fund to buy government debt and assets including exchange traded funds and real estate investment trusts.

China Rate Increase

In contrast, China’s central bank yesterday unexpectedly raised borrowing costs for the first time since 2007 to combat inflation. It lifted the benchmark one-year lending rate to 5.56 percent from 5.31 percent.

Nishimura said he welcomed the move while adding that the market reaction needs to be watched.

“It’s a good decision to avert the economy’s overheating and help to achieve a long-lasting, stable economic expansion,” Nishimura said at a press conference today. Even so, “financial markets are becoming nervous” following the rate increase and “we must keep a close watch on market moves.”

Nishimura said there is still a risk emerging economies will grow too rapidly. The U.S. slowdown’s effect on emerging economies won’t be “small” given the amount those countries export to the U.S., he said.

Overheating Risk

“There are still many economies whose measures to contain overheating are not considered to be sufficient” and “there remains a risk of overheating that the pace of growth in emerging economies might accelerate amid continued capital inflows,” he said.

Nishimura said Japan’s economic growth is probably slower than what the central bank initially projected in July. The BOJ will release its forecasts for gross domestic product and prices on Oct. 28.

Board members predicted in July that the Japanese economy will expand 2.6 percent in the year to March 2011 and slow to 1.9 percent the following year. Consumer prices excluding fresh food will decline 0.4 percent in the current fiscal year and rise 0.1 percent in the fiscal 2011, they said.

Japan’s government yesterday downgraded its assessment of the economy for the first time in 20 months as the export- driven recovery showed further signs of cooling.

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