UPDATE 1-BOJ deputy gov says won’t hesitate to ease again if risks spike

by on July 25, 2012 3:45 am BST

Tue Jul 24, 2012 11:45pm EDT

* BOJ scrutinising effect of past easing - Yamaguchi
    * Says BOJ ready to act if shock event derails recovery
    * Sticks to view Japan headed for recovery, warns of risks

    By Leika Kihara
    HIROSHIMA, Japan, July 25 (Reuters) - The Bank of Japan will
not hesitate to ease monetary policy further if risks to the
country's economy heighten sharply, a deputy governor said on
Wednesday, warning of the potential damage from Europe's
simmering debt crisis and the strong yen.
    The remarks came after two new members of the BOJ's policy
board said on Tuesday that policymakers should be prepared to
take bolder steps to end deflation, a sign the central bank
stands ready to offer additional stimulus to the export-reliant
economy should a yen spike and overseas slowdown hurt growth.
    Deputy Governor Hirohide Yamaguchi stuck to the BOJ's view
that Japan's economy is headed for a moderate recovery as robust
domestic demand, driven by reconstruction spending from last
year's earthquake, makes up for weakness in exports.
    He also said the central bank is still scrutinising the
effect of its monetary easing in February and April, which will
broaden over time as it steadily purchases assets to meet the
existing 70 trillion yen ($895 billion) target under its asset
buying and loan programme.
    "But of course if some kind of shock leads to the economy
undershooting our forecast or heightens risks to the outlook
sharply, we won't hesitate to ease monetary policy further,"
Yamaguchi told business leaders in Hiroshima, western Japan.
    While few analysts expect the central bank to expand
monetary stimulus in August, many say a spike in the yen or
worsening developments in Europe could force it into action in
coming months.
    "Our main scenario is that the BOJ will ease further by
expanding its asset purchase programme in October when it cuts
economic projections in its twice-yearly outlook report," said
Junko Nishioka, chief Japan economist at RBS Securities.
    "But further easing could come sooner if Europe's crisis
accelerates safe-haven fund flows to trigger a sudden spike in
the yen and a decline in share prices, dampening sentiment."
    The BOJ set a 1 percent inflation target and eased policy
via an increase in asset purchases in February. It followed up
with another easing in April to show its resolve to beat
deflation, which has stifled the economy for most of the past
two decades.
    The central bank has stood pat since then and has stressed
that it will only act again if risks to the economy heighten
sharply enough to derail its forecast of a moderate recovery.
    Many in the BOJ will probably want to save its ammunition
again at the next policy meeting on Aug. 8-9, although renewed
yen rises, fanned by market jitters over the euro, are putting
pressure on the bank to help exporters by taming the currency.
    Yamaguchi said the central bank must be vigilant to risks
clouding the outlook such as yen rises, Europe's debt crisis and
uncertainty over the U.S. and Chinese economies.
    "Exports have been somewhat lagging expectations due to the
overseas slowdown," he said.
    "Japan's economy is expected to resume a recovery. But the
outlook is uncertain," Yamaguchi said, adding that exports need
to pick up while the support from domestic demand lasts, for
Japan to see a sustained recovery.
    Exports fell in June from a year earlier, the first decline
in four months, data showed on Wednesday, hurt by the slowdown
in Europe, China and other markets.
    Japan's economy is expected to outperform most other
developed nations this year thanks to solid domestic demand, but
analysts have slashed forecasts for factory output as the
slowdown in external markets becomes more pronounced.
    Yamaguchi, one of the BOJ's two deputy governors, is a key
figure to watch for signals on the future direction of monetary
policy. Markets count him among board members more eager to ease
pre-emptively when needed to support the economy.