UPDATE 1-BOJ Gov Shirakawa warns on worsening fiscal balance

Sat May 28, 2011 4:17am EDT

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By Leika Kihara

TOKYO, May 28 (Reuters) - Bank of Japan Governor Masaaki Shirakawa warned of the country's worsening fiscal balance and stressed that policymakers need to come up with a strategy to restore its long-term fiscal health.

Shirakawa also repeated that the central bank should not buy government bonds for the purpose of monetising government debt or stabilising bond yields.

"Long-term interest rates will rise if markets feel that the central bank is buying bonds to finance fiscal spending or to stabilise bond yields," Shirakawa told a seminar on Saturday.

His comments came a day after ratings agency Fitch cut its outlook on Japan's sovereign debt, warning that the vast cost of the devastating earthquake in March and the still unknown bill for the clean-up of the nuclear disaster at Fukushima would further strain the country's already shaky public finances. [ID:nL3E7GR1A6]

"Japan is not faced with a rise in bond yields. But the deterioration of its fiscal balance is serious," Shirakawa said.

"Maintaining trust in Japan's currency and government bonds, both internationally and domestically, is a very important task at a time its economy is affected heavily by the earthquake." (Editing by Edmund Klamann)

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