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BOJ May Want to Mull Foreign Asset Buys, Kaieda Says

Banri Kaieda, Japan's economy minister
Banri Kaieda, Japan's economy minister. Photographer: Toshiyuki Aizawa/Bloomberg

The Bank of Japan may want to consider buying foreign-currency assets to help ease the yen’s appreciation, Economic Minister Banri Kaieda said.

“Such purchases can be an option for the central bank over the medium- to long-term,” Kaieda said in an interview in Tokyo on Oct. 22. “They would be effective” in curbing the Japanese currency’s gains, he said.

While the Bank of Japan could consider making purchases at some point, it’s not an option now because it might be regarded as a form of currency intervention, two central bank officials said on condition of anonymity. At a time when global policy makers are discussing how to avoid competitive devaluations, the bond buys may not appear appropriate, one of the officials said.

Kaieda’s remarks come as Japanese policy makers struggle to stop the yen’s advance and lift the country out of deflation using fiscal and monetary policy steps. The yen appreciated this month to its strongest level against the dollar since 1995, threatening Japan’s export-dependent recovery, even after its central bank loosened credit.

Foreign-asset purchases may support demand for the dollar and other currencies and help to weaken the relative strength of yen, which has gained more than 5 percent since Japan stepped into the currency market for the first time in six years on Sept. 15.

BOJ Balance Sheet

At the same time, any purchases of foreign assets mustn’t erode the health of the central bank’s balance sheet, Kaieda said. The Bank of Japan on Oct. 5 created a 5 trillion-yen fund ($62 billion) to buy assets including government and corporate bonds and exchange-traded funds, and pledged to keep rates near zero until deflation can be beaten.

Japan’s currency strengthened to a 15-year high of 80.85 to the dollar on Oct. 20. It traded at 80.72 at 3:55 p.m. in Tokyo today.

“If the BOJ embarks on aggressive policies, its action will be accompanied by risks,” Kaieda said. “It’s necessary to discuss how the bank can contain those risks” and avert the erosion of its trust in the institution.

Debt buying by the central bank shouldn’t be seen as an alternative to currency intervention, the economy minister said. The Japanese Finance Ministry oversees currency policy while the Bank of Japan is in charge of price stability.

‘Casually Jump’

“We shouldn’t casually jump on the measure” of buying foreign debt instead of intervening in the currency market to curb the yen’s appreciation, the minister said.

Kaieda said he welcomes the BOJ’s latest decision to increase asset purchases because the bank is “reversing its previous stance that there is little it can do with interest rates lowered near zero.”

“We appreciate that the BOJ is meeting the government’s expectations with the various measures,” Kaieda said, while adding that he has “questions” about whether the fund is large enough.

BOJ Governor Masaaki Shirakawa said this month the central bank may expand the fund if necessary to explore more monetary easing measures.

Deflation End

Kaieda also said the government would be able to conclude that deflation has ended should consumer prices achieve stable gains, which he views as continuous price increases for at least a quarter or two.

Given that a stronger yen makes imports cheaper and depresses prices, ending deflation may be delayed beyond the fiscal year starting April 2011, he said. The government had said in June it wanted prices to increase in that year.

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