Exclusive: Japan's Yosano says economy sound

TOKYO Thu Mar 17, 2011 6:06am EDT

TOKYO (Reuters) - Japanese markets have not become destabilized enough to warrant joint G7 currency intervention or government purchases of shares, Economics Minister Kaoru Yosano said on Thursday, stressing that the damage from last week's devastating quake to the country's economy would be limited.

Yosano also told Reuters in an interview an extra budget to fund disaster relief and reconstruction was set to exceed what Japan had spent after the 1995 earthquake in Kobe, but said Tokyo should have no trouble financing additional spending.

The yen spiked to a record high against the dollar, while shares in Japan and elsewhere in Asia fell on Thursday after U.S. officials said the risk of a catastrophic radiation leak from an earthquake-crippled Japanese nuclear plant was rising.

While financial markets initially focused on the likely economic costs of Friday's earthquake, the unfolding nuclear disaster has since taken center stage, spurring investors to dump shares and other riskier assets and switch to safer cash and government bonds.

"I don't think stock and currency markets are in a state of turmoil," Yosano said, when asked whether the G7 advanced nations should jointly intervene in the currency market to stem yen rises. "We would like to get psychological support from the G7," he added.

Speaking later to reporters, Yosano said he expected the group that comprises the United States, Japan, Germany, Britain, France, Italy and Canada to work together to limit any knock-on effect of events in Japan on prevent a knock-on effect of the disaster on the global economy.

G7 finance ministers will hold a conference call on Friday morning Japanese time to discuss steps to help Japan cope with the financial and economic impact of the disaster.

Speculation is rife that Japan may step into the currency market solo, or even ask its G7 counterparts for joint intervention, to stem sharp yen rises that would add to pains for the export-reliant economy.

With Tokyo stocks under pressure from global growth fears and a strong yen, some lawmakers have called on the government to support the market by with share purchases, but Yosano brushed off such suggestions.

"Now is not the time to consider such steps. Markets are starting to stabilize," he said.

Yosano said the government's emergency budget would probably exceed the 3.3 trillion yen in three extra budgets compiled after the Kobe earthquake.

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He said that while back in 1995 damage to buildings and infrastructure amounted to 10 trillion yen, total damage was 20 trillion once indirect costs such as disruption to transportation were included. Repairing the damage from last week's quake will be more costly, Yosano said, which means the government may need to issue new bonds to cover the costs.

"It will be just several trillion yen of deficit-covering bonds. How to fund the costs isn't a big problem. Both the private sector and the government have plenty of funds, and the Bank of Japan is providing ample liquidity. There's nothing to worry about in terms of funding," Yosano said.

He also said the extra costs for disaster relief will not force divert the government from its long-term fiscal reform plans.

The earthquake hit Japan just when its economy was about to emerge from a lull with output expected to fall sharply over the coming months. Some economists warned it could result in a deeper slowdown if power shortages prove significant and prolonged.

But Yosano said Japan's economy was unlikely to suffer a severe downturn, as demand for reconstruction work offset some of the damage on output.

"As a whole, Japan's (economic growth) won't turn hugely positive but won't suffer a huge contraction either."

Japanese administrative and business functions continue to operate as normal, while the quake's impact on Japanese companies operating globally will be limited, he said.

(Additional reporting by Shinji Kitamura; Editing by Tomasz Janowski)

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