UPDATE 3-BOJ warns of widening impact of Europe's debt debacle

Wed Nov 16, 2011 4:34am EST

Related Topics

* Policy rate kept on hold at 0-0.1 pct
    * BOJ holds off on boosting asset buying
    * BOJ cuts economic assessment, warns of slowdown
    * Europe debt crisis may hurt global growth-Shirakawa


    By Leika Kihara	
    TOKYO, Nov 16 (Reuters) - Bank of Japan Governor
Masaaki Shirakawa voiced growing concern on Wednesday that
Europe's debt crisis may trip up the global economy and warned
that it was already affecting emerging nations and Japan in
multiple ways.	
    Some central bank board members thought risks for Europe
have heightened recently, Shirakawa said after a two-day policy
review, but the BOJ nevertheless refrained from further action,
as it had eased monetary policy just three weeks ago.	
    "Market concern over Europe's sovereign debt problem and the
region's banks have not been eliminated," as seen in the recent
spike in Italian bond yields, Shirakawa told a news conference.	
    "Europe's debt problem is having a huge impact on the global
economy, and may hurt growth not just of Europe but of the
world." 	
    Japan is not immune, with the fallout coming through various
channels, such as the slowdown in its key Asian export markets
and a surge in the value of the yen as investors shy away from
riskier assets and look for safe havens from global financial
market turmoil, he said.	
    His stern tone suggested the central bank was ready to offer
further monetary stimulus if risks to Japan's economic recovery
increase.	
    The BOJ sounded more cautious on exports and output,
describing their growth as moderating, reflecting weakening
global demand.	
    "Japan's economy continues to pick up but at a more moderate
pace, mainly due to the effects of a slowdown in overseas
economies," it said in a statement.	
    In October, it said the economy continued to pick up with
exports and output rising as a trend.	
    "By downgrading its economic assessment, the BOJ indicated
its vigilance to risks regarding overseas economies, chiefly
uncertainty over Europe's debt crisis and the effect of Thai
floods," said Yuichi Kodama, an economist at Meiji Yasuda Life
Insurance in Tokyo.	
    "It's hard to predict the timing of the next action as it
solely depends on currency moves. But the BOJ may ease early
next year when the effects of last month's currency intervention
and monetary easing will fade," he said.	
    As expected, the central bank kept its key interest rate at
a range of zero to 0.1 percent by a unanimous vote and held off
on loosening policy further after it expanded its asset buying
scheme in late October.	
    	
    	
    YEN RISE KEEPS BOJ UNDER PRESSURE	
    Japan was the best performer among major advanced economies
in the third quarter, rebounding from an earthquake-triggered
recession. But growth is seen stagnating for the rest of this
year as the export-reliant economy begins to feel the pain from
a strong yen and slowing overseas demand. 	
    The decision to stand pat on policy on Wednesday reflects
the dominant view within the central bank that last month's
monetary easing already took into account the recent slump in
output and business sentiment.	
    With rates near zero, policymakers also want to save their
limited ammunition in case Europe's debt crisis escalates into a
global shock similar to that sparked by the collapse of Lehman
Brothers in 2008.	
    But pessimists in the board may argue for imminent action.	
    In a rare revelation by the chair of the consensus-favouring
BOJ, Shirakawa said some in the board -- though not a majority
-- saw a higher risk of Europe spiralling into a negative
feedback loop in which tighter bank credit, less fiscal spending
and an economic downturn feed into one another.	
    While Shirakawa did not disclose who voiced such concerns,
it might have been Ryuzo Miyao, who had his proposal for a
bigger stimulus voted down last month, or Seiji Nakamura, who
has said risks to Japan's economy have heightened even after
last month's monetary easing.	
    Despite toning down its economic assessment, the BOJ stuck
to its forecast that Japan is headed for a moderate recovery on
hope that fiscal spending for reconstruction from the March
earthquake will help make up for cooling overseas demand.	
    But the yen's persistent strength casts doubt over such a
scenario. The currency has returned close to levels before Tokyo
spent an estimated 7.7 trillion yen intervening in the currency
market two weeks ago, which is likely to keep the pressure on
the central bank to take more aggressive action to support the
economy. Sources familiar with its thinking have said that the
BOJ is ready to respond to any signs of contagion from Europe's
debt crisis by injecting huge amounts of liquidity via market
operations and loosening monetary policy. 	
    Any future easing will come via another increase in
purchases of financial assets, predominantly government bonds.	
    The central bank cut its growth forecasts and eased policy
on Oct. 27 by adding another 5 trillion yen ($65 billion) to its
asset buying scheme, bringing it to 20 trillion yen.
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