UPDATE 2-BOJ deputy gov says to ease if yen rise threatens recovery

by on July 25, 2012 7:39 am BST

Wed Jul 25, 2012 3:39am 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
    * Signals readiness to ponder new policy options

    By Leika Kihara
    HIROSHIMA, Japan, July 25 (Reuters) - The Bank of Japan will
ease monetary policy further if yen rises threaten the economy's
recovery, a deputy governor said, signalling the bank's growing
alarm over the potential pain from recent yen gains and Europe's
deepening debt crisis.
    Hirohide Yamaguchi also said the central bank may consider
new policy steps that could better support the economy, although
he did not elaborate.
    "If you ask that topping up the BOJ's asset-buying programme
further may have become meaningless (in supporting the economy),
I would say that the BOJ will continue to pursue whatever steps
that may be deemed as more effective," he told a news conference
after meeting with business leaders in Hiroshima, western Japan.
    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.
    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.
    But he warned that with the outlook for overseas demand
highly uncertain, the BOJ must be vigilant to the risk that a
stronger currency could hurt exports and business sentiment.
    "If we conclude that yen rises severely threaten Japan's
recovery path, or that such risks have heightened sharply, we
will implement additional monetary easing steps," he said.
    Yamaguchi, however, stressed that the decision on whether to
ease further was not imminent, and that yen rises alone will not
automatically trigger additional stimulus.
    "What's important is to carefully scrutinise how the yen's
rise affects Japan's economy," he said in Hiroshima, home to
major automaker Mazda Motor Corp.
    While few analysts expect the central bank to expand
monetary stimulus in August, Yamaguchi's remarks may heighten
expectations that 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
    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.
    Yamaguchi said the BOJ is still studying the effect of its
easing in February and April, which will broaden over time as it
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 policy further," he said.
    With interest rates virtually at zero and companies hesitant
to borrow money for investment, the BOJ has been struggling to
force-feed money to markets already awash with excess cash.
    The central bank's asset-buying programme aims to nudge down
borrowing costs but with two-year yields stuck at 0.1 percent
and five-year yields near 0.2 percent, critics say the bank may
need to ponder other tools to help the economy.
    Takehiro Sato, one of the new BOJ board members, said on
Tuesday that purchasing foreign bonds could be one option as
long as the central bank made it clear that it is providing
liquidity and not trying to manipulate currencies.
    Yamaguchi, however, was cautious about the idea, saying that
doing so would be considered as an attempt to weaken the yen and
would breach the finance ministry's jurisdiction over currency
    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.
    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.
    Yamaguchi, a key figure to watch for clues on the future
direction of monetary policy, is considered as among board
members more eager to ease pre-emptively to support the economy.