Update: BOJ Shirakawa: FX Does Not Directly Dictate Mon Pol
Published Tuesday, 10th August 2010 09:51 pm - © 2010 MNI News
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TOKYO (MNI) - Bank of Japan Governor Masaaki Shirakawa on Tuesday said that fluctuations in foreign exchange rates do not directly dictate the BOJ's monetary policy-making because the forex impact on economic growth must be examined in a global and comprehensive context.
Shirakawa also told a news conference after a two-day policy meeting that the BOJ board still believes that upside and downside risks to Japan's sustained economic growth are largely balanced despite signs of a slower U.S. recovery and the recent appreciation of the yen. "I don't think there are any central banks in advanced economies that regard levels of foreign exchange rates themselves as a target for monetary policy," he said, adding that the BOJ and other major central banks formulate policy by checking various economic and price factors.
"Foreign exchanges are one of the factors that affect the economic climate, but they do not immediately determine monetary policy," Shirakawa said. The governor echoed comments made by BOJ Deputy Governor Hirohide Yamaguchi on July 21 that the central bank won't consider taking monetary policy action based on any specific foreign exchanges rates.
Yamaguchi told a news conference in Toyama City, central Japan, that the economy can better cope with the impact of a high yen now compared with eight months ago, when business sentiment and corporate profits were much weaker.
"We have never considered taking policy steps on the premise of specific foreign exchange rates and we have no intention of formulating our policy based on specific foreign exchange rates in the future, either," said Yamaguchi.
Shirakawa indicated that the BOJ sees no need to take further action at this point to safeguard Japan's "moderate" economic recovery from the threat of the high yen and slower demand for Japanese exports.
Generally speaking, he said, the appreciation of the yen could hurt business sentiment and push down corporate profits in the short term, but stressed that the overall impact of forex moves depend on the global economic climate, corporate sales and profits and financial markets.
"There are various factors, so we need to see it in a well-balanced way," he said.
"The global economic growth has been led by emerging countries and corporate profits are rising while long-term rates are falling, leading corporate funding costs lower. The effects of credit-easing have intensified," Shirakawa said, largely repeating his comments made last month on how one should analyze the impact of the high yen.
"Based on this, the Japanese economy has so far been moving along the line of our outlook provided in April and the update given in July," he concluded. Earlier on Tuesday, the BOJ policy board voted unanimously to leave the target for the overnight lending rate among commercial banks unchanged at 0.1%, while repeating that the economy, facing both upside and downside risks, is likely to stay on a recovery track. The BOJ has maintained the target at 0.1% since December 2008, when it lowered the rate from 0.3% at the height of the global financial crisis. This rate is seen as the lowest possible without hurting market functions. In today's policy statement, the BOJ continued to cite "even faster growth" in emerging and commodity-exporting economies as the key upside risk to Japan's economic and price moves.
The BOJ also repeated that there are also downside risks "such as those related to international financial developments." The fiscal problems in Europe and slower U.S. growth can cause sharp fluctuations in forex rates and affect the real economy.
"There is a difference in nuance among board members but what I've just said is a consensus," Shirakawa said, referring to his view that upside and downside risks are still being largely balanced. "Risk balance assessment is becoming harder than before," he said. "Deciding what risks -- upside or downside -- are higher may not be the best way to grasp the Japanese economic climate.""Japanese exports to China have been high but its pace is slowing slightly. In the short term, it is a downside risk, but from the long-term view point, we should see it as a positive move," he said. As for developments in the U.S. economy, which can become a large downside risk to Japan, Shirakawa said, "The pace of the (U.S.) economy is slowing but the overall economy continues recovering moderately.""We have been cautious about the U.S. economic outlook," he said, reminding that it takes a long time to correct balance sheet problems at both businesses and households.
"Some market participants appeared to be optimistic about the U.S. economy, so there was a gap between our outlook and the market view. We pay attention to developments in the U.S. economy as a risk factor but they have been within the range of our outlook (provided in April)."
Shirakawa also said that the BOJ's view on European growth prospects has also been cautious.
"The financial markets in Europe in the spring (around April) were unstable but economic data were relatively strong. The state of the European and U.S. economies continues to face adjustments stemming from the burst of the credit bubble. The European economy is also facing sovereign debt risks, although its financial markets are slightly stabilizing following the release of the stress tests," he said. Market players are waiting to see whether the Fed will conduct additional easing of credit at its Federal Open Market Committee meeting later today.
Hope for a further Fed easing was raised by weaker-than-expected jobs data for July released on Friday, encouraging Japanese investors to increase purchases of Japanese government bonds.
Shirakawa noted that Japan's financial institutions continue to invest heavily in JGBs as corporate fund demand remains weak but added that they don't have a large interest rate management risk.
"In general, long-term interest rates are influenced by medium- to long-term price expectations and economic movements. (The recent drop in long-term interest rates) is also influenced by the declines in overseas interest rates based on the cautious view on the U.S. economy," he said.
He added that the drop in long-term interest rates itself contributes to intensifying effects of the current accommodative monetary policy while lower returns on investment prompts institutional investors to be cautious about risk management.
"Whether the drop in long-term interest rates will reverse is closely watched but there is no big interest rate risk for Japanese banks now," Shirakawa said.
The 10-year JGB yield briefly fell to 0.995% on Aug. 4 for the lowest level since August 2003 as the safer fixed-income instrument attracted investors on concern over slower global economic growth. Shirakawa noted that Japan's economy continues moving in line with its baseline recovery scenario provided in April but added that its sustainability hasn't strengthened.
"The growth of exports and production is gradually filtering through to domestic private demand and the trend remains intact. But we haven't judged that the mechanism has strengthened," he said.
Asked how policymakers should cope with unexpected "exogenous shocks," such as oil spills, earthquakes and financial crises, Shirakawa replied that the BOJ puts in considerable resources to ensure that the economy and financial system continue functioning in crises.
"To a lesser extent in terms of exogenous shocks, we always keep bubbles in mind and are checking such risk in formulating monetary policy," he said.
Shirakawa said he has no advice for firms that are dealing with the impact of the high yen, saying they are all making painful efforts and that he believes that business owners intrinsically have an "animal spirit" and innovative minds.
"The most important thing for policymakers is to create an economic environment so their efforts will be rewarded at a maximum level, than preaching them what to do.""As for the BOJ, it's important to create a stable macro-economic climate. Our program to make loans to banks that are lending for growth areas is not just supplying funds, but through this, we wish to communicate more on what is necessary to improve the foundation for economic growth and what are bottlenecks."
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