BOJ ready to act on appreciation of yen
05:55 AM Sep 27, 2010
KOBE - Bank of Japan Governor Masaaki Shirakawa said yesterday the central bank is closely watching the effect on the economy of the yen's appreciation. "We are ready to implement appropriate action in a timely manner if judged necessary," he said at a forum hosted by the Japan Society of Monetary Economics.
Mr Shirakawa spoke publicly two days after the yen weakened amid speculation Japan had sold its currency for a second time after ending a six-year period of refraining from intervention. BOJ policymakers repeated this month that the bank will take more policy actions if needed, indicating their willingness to provide additional monetary stimulus.
"We are watching how the yen's current gain affects the Japanese economy," Mr Shirakawa said yesterday. "We have to pay more attention than before to downside risk to the economy."
But he declined to comment on specific yen levels. The yen tumbled 1 per cent in about 10 minutes on Friday, reaching a low of 85.40 per US dollar. The decline was the biggest since Sept 15, when Japan stepped back into markets after the currency surged to the highest level since 1995. The yen strengthened 1.9 per cent last week to 84.26 per US dollar.
Mr Shirakawa yesterday said that "monetising debt" risks raising bond yields. The BOJ has a self-imposed cap on government-bond buying to avoid such purchases from being regarded as monetising public debt. The bank stipulates that purchases cannot exceed the amount of banknotes in circulation.
"If government bond purchases by a central bank is regarded as a tool to pay for fiscal expenditure, or an act of debt monetisation, that would spur inflation expectations and increase government bond yields," Mr Shirakawa said.
His comments came as the central bank faces mounting pressure to increase monthly purchases of government bonds, and as politicians flag the possibility of amending the Bank of Japan Law, which guarantees the central bank's independence from the government.
The Governor also defended the Bank of Japan Law, which stipulates the purpose of monetary policy is to achieve stable prices and sound economic growth.
"The current law makes it possible to pursue sustainable price stability over the medium and long term" while avoiding big swings in economic growth, he said. Bloomberg