NAGOYA: Bank of Japan Governor Masaaki Shirakawa said on Monday the country's economy will eventually resume a recovery but will remain in a severe state for the time being due to the pain from recent yen rises and slowing global growth.
Below are key quotes from Shirakawa's speech and remarks in a meeting with business leaders in Nagoya in the central Japan prefecture of Aichi, home to automobile giant Toyota Motor Corp :
EUROPE DEBT WOES
"The BoJ's baseline scenario is that from a slightly long-term perspective, Japan's economy will eventually return to a sustainable growth path with price stability. But we recognise that this outlook is subject to various uncertainties.
"The most significant risk is the sovereign debt problem in Europe, or in the words of European authorities in official documents, 'the sovereign debt crisis'.
"In Europe, government bond yields for countries whose fiscal conditions have become subject to concern have been rising significantly. Rates have started to rise even in Italy, the third-largest economy in the euro area.
"As a result, European financial institutions with large holdings of government bonds in question have faced difficulties raising funds from the market, forcing them to curb lending.
"In Europe, shrinking market confidence in its fiscal state is heightening concern about the stability of the region's financial system, which in turn is affecting the economy. An adverse feedback loop is beginning to operate with respect to the fiscal situation, the financial system, and economic activity."
JAPAN ECONOMY, YEN
"When uncertainty over the overseas economic outlook is high, as is the case now, rises in the yen may hurt Japan's economy by reducing exports and corporate profits as well as by worsening business sentiment. We need to be mindful of this.
"The government decides when to intervene and the BoJ acts as its agent. The G7 and G20 share the view that excessive volatility and disorderly currency moves are undesirable. Based on this understanding, Japan conducted intervention and this had a certain effect ... I hope to continue efforts to gain understanding (of Japan's stance on currencies).
"Currency moves have a big effect on the outlook for Japan's economy and prices. The BoJ does not ease policy in response to each and every currency move. We ease policy when the currency moves affect the outlook for the economy."
DEFLATION
"To believe that deflation could be solved by printing money alone would be to take a too simplistic view of the problem. When interest rates are high we can cut rates, but that's not possible with rates now effectively at zero.
"In this situation there is virtually no cost for holding on to cash. When financial uncertainty is high, as in Europe now, financial institutions tend to hoard cash. That means even if central banks supply huge amounts of liquidity, private financial institutions will just keep on hoarding cash.
The BoJ will strive to ease aggressively, both in terms of interest rates and the amount of liquidity. On the other hand, (government and corporate) efforts to make use of this easy monetary environment are also needed. Only when the two come together can Japan escape deflation."
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