A stronger yen may force BOJ to act
By Stanley White and Tetsushi Kajimoto |
August 12, 2010, Thursday
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Print Edition
Print Edition
WEAK Japanese economic data and a fall in the US dollar to an eight-month low against the yen yesterday prodded Tokyo closer to fresh action to support an already fragile economic recovery.
Market speculation that the Bank of Japan will have to relax its already loose monetary policy has increased as policymakers have raised the alarm over a fall in the US dollar against the yen, which they fear could hurt exports.
The greenback dropped below 85 yen yesterday and while the finance minister said he was watching the market extremely carefully, he declined to comment on the possibility of currency intervention.
If the US dollar slips below November's low of 84.82 yen, it would mark the currency's weakest level in 15 years.
"A rapid yen rise would boost deflationary factors, so the government and the BOJ must act as one in considering what to do given our commitment to act against deflation," said Kohei Otsuka, the vice banking minister.
This week the BOJ avoided fresh policy action over the yen's rise, which some policy makers worry will undermine the exports that have pulled Japan out of the global downturn.
A faltering US recovery - which prompted the Federal Reserve to take a fresh step on Tuesday to support the economy - and a slowdown in China could further undermine Japan's recovery given its reliance on overseas demand.
"Given the weak developments in the US economy, the Japanese economy will probably suffer later this year, so the BOJ wants to save its measures until then," said Seiji Shiraishi, chief economist for Japan at HSBC.
The BOJ slashed its policy rate to just 0.1 percent in the downturn and has set up a bank lending operation to support the recovery.
"Ideally, central banks should be forward looking, but the BOJ has almost no measures left. It isn't good for a central bank to be backward looking, but for the BOJ it can't be helped," Shiraishi said.
Indeed, BOJ inaction could backfire, analysts said, because the US Federal Reserve's decision to keep buying government bonds will increase the allure of the yen against the US dollar.
Otsuka, a former BOJ official and now a key policy maker in Prime Minister Naoto Kan's Democratic Party, warned that the yen was at a critical juncture.
Market speculation that the Bank of Japan will have to relax its already loose monetary policy has increased as policymakers have raised the alarm over a fall in the US dollar against the yen, which they fear could hurt exports.
The greenback dropped below 85 yen yesterday and while the finance minister said he was watching the market extremely carefully, he declined to comment on the possibility of currency intervention.
If the US dollar slips below November's low of 84.82 yen, it would mark the currency's weakest level in 15 years.
"A rapid yen rise would boost deflationary factors, so the government and the BOJ must act as one in considering what to do given our commitment to act against deflation," said Kohei Otsuka, the vice banking minister.
This week the BOJ avoided fresh policy action over the yen's rise, which some policy makers worry will undermine the exports that have pulled Japan out of the global downturn.
A faltering US recovery - which prompted the Federal Reserve to take a fresh step on Tuesday to support the economy - and a slowdown in China could further undermine Japan's recovery given its reliance on overseas demand.
"Given the weak developments in the US economy, the Japanese economy will probably suffer later this year, so the BOJ wants to save its measures until then," said Seiji Shiraishi, chief economist for Japan at HSBC.
The BOJ slashed its policy rate to just 0.1 percent in the downturn and has set up a bank lending operation to support the recovery.
"Ideally, central banks should be forward looking, but the BOJ has almost no measures left. It isn't good for a central bank to be backward looking, but for the BOJ it can't be helped," Shiraishi said.
Indeed, BOJ inaction could backfire, analysts said, because the US Federal Reserve's decision to keep buying government bonds will increase the allure of the yen against the US dollar.
Otsuka, a former BOJ official and now a key policy maker in Prime Minister Naoto Kan's Democratic Party, warned that the yen was at a critical juncture.
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