Japan's central bank must be vigilant about damage the yen's strength may still inflict on the economy, board member Koji Ishida told Reuters, signalling its readiness to boost monetary stimulus again if the nation's recovery appears under threat. But he added that the Bank of Japan aimed to forestall future risks by easing monetary policy last week, suggesting it will be inclined to stand pat when it meets again on November 15-16 unless developments in Europe trigger severe market turmoil.
In his first interview with media since joining the board in June, Ishida challenged the idea being floated in markets that the BoJ should target longer-dated government bonds under its asset buying scheme, saying it already takes up such debt in huge volumes in a separate programme.
Ishida, 64, a veteran commercial banker, said Europe's debt crisis now poses a huge risk to Japan's economy and warned of the pain from the strong yen, even after Tokyo's unilateral intervention on Monday to stem sharp rises in the currency. "Yen rises under current circumstances will hurt corporate revenues," Ishida told Reuters. "Business sentiment may worsen as a result. We must be vigilant of the adverse impact on Japan's economy," he said in the interview, which was conducted on Wednesday but embargoed until Friday.
In a sign of growing concern within the BoJ about fallout from the eurozone debt crisis, Ishida warned of a "tail risk" - events that rarely happen but when they do have a huge impact on the economy - of the debt woes triggering a global market shock like the one after the Lehman Brothers collapse in 2008. "If Japan's economy is affected by a very big shock like the one after Lehman's (collapse), there's a tail risk of Japan's financial system being affected too, although I trust Europe is making efforts to resolve the situation to prevent such a risk from materialising," he said.
Doubts about Europe's ability to contain the debt crisis have jolted global markets, driving up the yen to record highs on safe-haven demand to the dismay of Japanese policymakers worried about damage to the export-reliant economy, just emerging from recession after the devastating March earthquake. Tokyo's currency intervention came days after the BoJ last week eased policy by boosting its asset buying programme, under which it purchases government bonds and corporate debt, by 5 trillion yen ($64 billion) to 20 trillion yen. Ishida said last week's monetary easing was based on the view that some risks the BoJ tried to pre-empt had materialised.
"We eased further (last week) with this in mind, also taking into account the risk that the outlook for the economy and prices may worsen further," he said. Ishida said the European Central Bank's surprise interest rate cut on Thursday was likely based on its view that growth in the region will slow due to tension in financial markets.
"We hope to continue monitoring developments in Europe with utmost caution," he said on Friday in response to an additional query by Reuters. Ishida declined to comment on whether Japan should intervene again and offered few clues on when and how the BoJ will next ease policy, saying the bank does not have any preconception on future moves and will choose the best option at the time.
Still, he stuck to the BoJ's official line that Japan's economy will resume a moderate recovery and see prices gradually rise in the coming years. That suggests he is neither a hawk nor a dove and will likely vote with the majority for now, unlike a few pessimists in the board who in recent months had unsuccessfully proposed easing earlier or more aggressively. "Overseas growth is somewhat weaker than initially expected. There's also the effect of yen rises," Ishida said.
"But our main scenario is that there's no change to the mechanism that will put the economy back on a moderate recovery path" as solid overseas growth continues to support exports and demand related to post-quake reconstruction picks up, he said. Under the asset buying scheme topped up last week, the BoJ pledged by end of next year to buy 9 trillion yen in government bonds with up to two years until maturity. Aside from that, it buys 21.6 trillion yen of long-term government bonds yearly.