Bank of Japan Governor Masaaki Shirakawa said yesterday the central bank was closely watching the effect on the economy of the yen’s appreciation, and is prepared to take “appropriate action” if needed.
“We are ready to implement appropriate action in a timely manner if judged necessary,” Shirakawa said at a forum hosted by the Japan Society of Monetary Economics in Kobe.
Shirakawa spoke publicly two days after the yen weakened amid speculation Japan had sold its currency for a second time after ending a six-year period of refraining from intervention. Bank policy makers repeated this month that the bank will take more policy actions if needed, indicating their willingness to provide additional monetary stimulus.
“We are watching how the yen’s current gain affects the Japanese economy,” Shirakawa said. “We have to pay more attention than before to downside risk to the economy.”
Shirakawa declined to comment on specific yen levels, adding that exchange rates move “for various reasons.”
The yen tumbled 1 percent in about 10 minutes on Friday, reaching a low of ¥85.40 per US dollar. The decline was the biggest since Sept. 15, when Japan stepped back into markets after the currency surged to the highest level since 1995. The yen strengthened 1.9 percent last week to ¥84.26 per US dollar.
Shirakawa also said that “monetizing debt” risks raising bond yields.
The bank has a self-imposed cap on government bond buying to avoid such purchases from being regarded as monetizing public debt. The bank stipulates that purchases cannot exceed the amount of banknotes in circulation.
“If government bond purchases by a central bank is regarded as a tool to pay for fiscal expenditure or an act of debt monetization, that would spur inflation expectations and increase government bond yields,” Shirakawa said.
Shirakawa comments came as the central bank faces mounting pressure to increase monthly purchases of government bonds, and as politicians flag the possibility of amending the Bank of Japan Law, which guarantees the central bank’s independence from the government.
Analysts at Standard and Poor’s and Moody’s Investors Service this month said the bank could buy more government bonds and expand its balance sheet, while Ichiro Ozawa, former No. 2 in the ruling Democratic Party of Japan, said on Sept. 14 the bank law may need changing so that the central bank and the government can work closer to beat deflation.
Shirakawa defended the bank’s current policy framework, describing it as “flexible” and “advanced.”
“Central banks which don’t adopt inflation targeting, like the [Bank of Japan] and the [US] Fed, have published favorable price levels over the long-term,” he said.
Bank board members say they consider consumer prices to be stable in a positive range of up to 2 percent, with the median level of 1 percent.
The governor also defended the Bank of Japan Law, which stipulates the purpose of monetary policy is to achieve stable prices and sound economic growth.
“The current law makes it possible to pursue sustainable price stability over the medium and long-term” while avoiding big swings in economic growth, he said.
Shirakawa also said long-term sustainability of the government’s fiscal balance was a “crucial factor” in maintaining currency and finance stability.
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