Japan's central bank chief Masaru Hayami said the US economic outlook and the rising yen are threats to an economic recovery, and urged Junichiro Koizumi's government to do more to help growth take hold.
"We must pay attention to the movement of the global economy, including the US and the movements of currency and other financial markets," Hayami said in his opening speech at the quarterly meeting of the central bank's branch managers.
He said the economy, which fell into recession in November 2000, has ``almost stabilized as exports and production gain momentum and corporate profits and business sentiment improve,'' repeating the main assessment from the bank's monthly report, released last week.
The yen's 13.6 percent rise against the dollar this year may dash prospects of a recovery from the nation's third recession in a decade by eroding earnings at exporters, who accounted for half the first quarter's economic growth, the first in a year.
"The fate of Japan's budding recovery hangs on how the US economy develops," Tetsuro Sugiura, chief economist at Fuji Research Institute, told Bloomberg Television.
The Nikkei 225 stock average fell 0.1 percent to 10,189.01. The index earlier fell below 10,000 for the first time in five months after a spate of accounting irregularities and profit forecast cuts in the US sent the Dow Jones Industrial Average to its lowest in almost four years Friday. The US benchmark stock index has lost a fifth of its value this year.
The stronger yen has exporters in Osaka worried, said Eiji Muto, the manager of the central bank's branch in Japan's second-biggest industrial area.
Muto said the yen's rally, which gained momentum in April, might not have hurt second quarter earnings much because companies usually hedge currency risks for at least three months into the future.
"The problem is, if the yen keeps its current strength or rises further, that would affect exporters' sales and profits -- that's what Osaka's companies are worried about."
The central bank has kept interest rates near zero since March last year and has made trillions of yen available to banks in a bid to stop a five-year slide in lending and end a 12-year economic slump.
Hayami has said the bank will maintain that policy until prices, excluding fresh food, stop falling from year-ago levels. Using that measure, prices began falling in July 1998, leveled off between May and September 1999, then resumed a slide that has lasted 32 months.
"To make monetary policy more effective and achieve sustainable growth, it's essential to push forward structural reform and to boost domestic demand," Hayami said in today's speech. "It's important to implement concrete steps to push for deregulation and tax reform."
He also called on banks to clear their bad loans.
"Japan's financial system is still plagued with many problems. The urgent issue is to write off bad loans held by banks as early as possible, and it's also a big goal for lenders to improve their profitability and financial health," he said.
Japan's seven largest banks, including Mizuho Holdings Inc, had a combined Japanese yen 26.8 trillion (US$231 billion) of non-performing loans as of March 31, up 30 percent up from six months ago, according to the Financial Supervisory Agency, Japan's bank watchdog.
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