BOJ warns of weakening exports, output; policy on hold
TOKYO, Aug 9 – The Bank of Japan kept monetary policy steady today but cut its assessment on exports and output as companies feel the pinch from slowing global growth, signalling its readiness to expand stimulus again if risks to the outlook grow.
BOJ Governor Masaaki Shirakawa (picture) warned that while he still expects exports to recover over time, the fallout from Europe’s debt crisis was broadening and may delay a pickup in key markets for Japanese goods like the United States and China.
“Europe’s sovereign debt woes are already having a huge impact on the global economy. If the situation worsens further, it could trigger market turmoil or further cool global growth,” he told a news conference.
However, Shirakawa gave few clues on when the BOJ could next ease policy, and ruled out an idea floated by a new board member that the central bank should buy foreign bonds.
“If the BOJ were to buy foreign bonds for the purpose of reversing yen rises or weakening the yen, that would be equivalent to currency intervention,” which falls under the jurisdiction of the government, he said.
As widely expected, the central bank refrained from topping up the 70 trillion yen (RM2.73 trillion) target for its asset buying and loan programme.
Pressure for immediate action has eased with the yen having barely moved after last week’s better-than-expected US jobs data, as well as decisions by the Federal Reserve and the European Central Bank to keep policy steady for now.
Newly appointed members Takehiro Sato and Takahide Kiuchi joined the policy debate, bringing the nine-member board to full force for the first time since early April.
Both of them, formerly prominent economists, have argued that the BOJ’s price forecasts are too optimistic and that there was more the bank can do, such as purchase foreign bonds.
Japan’s economy is set to outperform most other developed nations thanks to solid domestic demand, with the International Monetary Fund forecasting growth of 2.5 per cent this year.
That gives the BOJ more breathing space than its US and European counterparts, which signalled acting as early as next month to battle slack growth and heightening market strains.
Having loosened policy in February and April, the BOJ has stressed that it will act again only if risks heighten enough to force it to abandon its recovery forecast.
It is counting on global demand for Japanese goods to pick up before the boost from spending for rebuilding from last year’s earthquake peaks.
But a growing number of BOJ officials are now less convinced about the strength of Japan’s recovery due to the growing global fallout from the euro-zone debt crisis.
Japanese manufacturing activity declined in July at the fastest pace since last year’s earthquake. Exports marked the first annual drop in four months and factory output unexpectedly dipped in June as slowdowns in Europe and China hurt demand.
Reflecting the slowdown, the BOJ cut its assessment on exports and production, and warned that improvements in overseas growth was limited in scope.
“The pick-up in exports has moderated, while production has been relatively weak,” the BOJ said in a statement announcing its policy decision. That was a bleaker view than last month, when it said exports and output were picking up.
Some analysts expect the BOJ to ease again by October, when it conducts a quarterly review of long-term growth forecasts.
“The BOJ is well aware of the significant downside risks and will probably downgrade its assessment in September or October. This will provide the reason to ease policy further,” said Masamichi Adachi, senior economist at JP Morgan Securities.
The BOJ, however, probably wants to stand pat for as long as possible, partly because it is struggling already to pump money into markets already awash with excess liquidity, as risk-aversive investors flock to the relative safety of Japanese assets.
Despite fine-tuning its asset buying and loan programme to smoothen fund supply last month, the BOJ missed its bond buying target in auctions last week, casting doubt on whether it can meet the 70-trillion-yen target.
That has led to speculation that the BOJ will soon scrap a rule that it will only buy government bonds with interest rates of 0.1 per cent or higher, so it can buy those yielding less than that from the market.
Shirakawa said he saw no need to scrap the rule for now but did not rule out the possibility in the future, saying that the BOJ will scrutinise market developments and upcoming auction results in reaching a decision. – Reuters