Reuters: US Dollar Report: UPDATE 1-BOJ Shirakawa warns of yen rise pain, China slowdown

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UPDATE 1-BOJ Shirakawa warns of yen rise pain, China slowdown Sep 6th 2012, 06:01 Thu Sep 6, 2012 2:01am EDT * China experiencing prolonged slowdown - BOJ Shirakawa * Adds yen rise have big negative impact on exports * Keeps mum on timing, likelihood of further easing * Warns against complacency over Japan's fiscal state By Leika Kihara TOKYO, Sept 6 (Reuters) - Bank of Japan Governor Masaaki Shirakawa on Thursday warned of headwinds to the country's economic recovery such as a prolonged slowdown in China's economy and a stubbornly strong yen that is hurting exports and corporate sentiment. But he offered few clues on whether further monetary easing was on the horizon and cautioned against expecting too much from central banks, saying that ultra-loose policies can only buy time and won't cure fundamental problems hampering growth. "Current yen rises have a big negative impact on exports, corporate profits and business sentiment," Shirakawa said in a seminar discussing global economic developments in Tokyo. "When there is strong uncertainty over the overseas economic outlook, we are more mindful of the potential damage of a strong yen," he said. Shirakawa maintained the view that Japan's economy is headed for a moderate recovery but warned that the key was whether overseas growth will pick up while domestic demand remains firm, suggesting his waning conviction over the economy's recovery. "China is experiencing a somewhat prolonged slowdown," while Japanese exports and factory output are weakening, he said. His comments came after BOJ board member Ryuzo Miyao on Wednesday signalled the BOJ's readiness to take bold action if needed, and warned that exports and output may not pick up in time to ensure a recovery in the world's third-largest economy. Shirakawa said the central bank continues to proceed with powerful monetary easing by pumping money via its asset-buying programme. But he added that structural reforms and measures to boost Japan's long-term growth potential were more important. "Central banks can buy time with fund supply but can't offer a solution to fundamental problems," he said. "Central bank action cannot substitute for other measures that need to be taken (to revive growth)." The BOJ kept monetary policy steady in August, and holds its next rate review on Sept. 18-19. Many market players expect the central bank to ease again later this year but hold off on doing so until Oct. 30, when it reviews its long-term economic and price forecasts in a semi-annual outlook report. However, it may cut its assessment on exports and output this month if it feels that the global slowdown would last longer than expected, sources familiar with its thinking say. Shirakawa also called for progress in Japan's fiscal reforms and warned against complacency over current very-low bond yields which he said may spike in tandem with any sharp rises in overseas yields. "Words aren't enough. Action to sustain market trust is also important. Not doing anything forever (to fix Japan's finances) will lead to a rise in long-term interest rates," he said. A rise in overseas bond yields could also trigger a spike in Japanese long-term interest rates given the correlation between the two is "quite high," he added. Japanese long-term interest rates have remained low even as political deadlock delays much-needed fiscal reforms, largely because risk averse domestic investors are the main buyers of o Japanese government bonds (JGB), and are content to hold onto them. Prime Minister Yoshihiko Noda managed to pass through parliament bills to raise the country's sales tax rate but analysts say that is not enough to rein in Japan's huge public debt which, at double the size of its economy, is the biggest among major industrialised nations. Japan's economy is expected to outpace growth of other major industrialised nations with the government projecting an expansion of 2.2 percent in the current year to March 2013, as a boost from government stimulus and spending for rebuilding from last year's earthquake underpin domestic demand. But some analysts believe the impact of that reconstruction bounce may begin to wane by year end, making the economy even more vulnerable to external conditions. The BOJ set a 1 percent inflation target and boosted asset purchases in February to convince markets it was serious about pulling the economy out of deflation, which hampers consumer spending and business investment. It followed up with another increase in its asset buying pool in April, but has held fire since then. Link this Share this Digg this Email Reprints

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