Bank of Japan Governor Masaaki Shirakawa on Friday warned of a possible delay in China's economic pickup and a strong yen that could add pain to Japan's economic recovery, signalling the bank's readiness to offer monetary stimulus if risks heighten further.
Japan's economy is expected to outpace major industrialised nations with the government projecting an expansion of 2.2 percent in the current year to March 2013, as a boost from government stimulus and spending on rebuilding after last year's earthquake underpin domestic demand. Shirakawa maintained the BoJ's view that the economy was resuming a moderate recovery but warned that the timing of a pickup in external demand was uncertain as China's slowdown persists. "We must be mindful of whether China's economic slowdown may be further prolonged," he said.
Japanese exports slumped the most in six months in July as shipments to Europe and China tumbled, adding to concerns over global demand after a string of dire trade figures from Asia's export engines. Shirakawa said the central bank will take into account the pain inflicted by the yen's strength when setting policy, noting the business community unease over the yen's loss of competitiveness, particularly against the South Korean won.
"The BoJ views yen rises as having a big negative impact on Japan's economy," Shirakawa told business leaders in Osaka, western Japan, home to electronic giants like Panasonic and Sharp which face tough competition from its South Korean rivals. "The government and the BoJ haven't been sitting idly against yen rises," he said. "The government has intervened in the currency market when necessary, while the BoJ is pursuing powerful monetary easing."
Shirakawa stressed that monetary conditions are already very loose in Japan, with the benchmark interest rates kept between zero and 0.1 percent. Shirakawa said shocking markets by loosening monetary policy unexpectedly was counter-productive, and the "surprise" effect was generally short-lived.
And he called for government and corporate efforts to make use of cheap money, through deregulation and investment in new areas, to beat deflation that has plagued Japan for more than a decade. The government, however, is facing a political battle to push legislation through a split parliament that is needed to sell bonds for this fiscal year's budget, with Prime Minister Yoshihiko Noda under pressure from the opposition to call an early election.
Without a breakthrough, the government could run out of money for welfare benefits and would probably have to start next month cutting grants to local governments and government-affiliated agencies. The BoJ kept monetary policy steady this month, standing pat for the fourth straight month after delivering extra stimulus measures in February and April. The central bank set a 1 percent inflation target and boosted bond buying in February to convince markets it was serious about pulling the economy out of deflation, which hampers consumer spending and business investment.
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