TOKYO The Bank of Japan will act boldly and flexibly when necessary to support the economy, its deputy governor said, signaling readiness to expand stimulus even after last week's monetary easing as the pain from China's slowdown and Europe's debt crisis persist.
The central bank eased policy last week by boosting bond purchases because manufacturing activity in many countries had weakened more than expected, hitting Japanese exports and factory output, BOJ Deputy Governor Hirohide Yamaguchi said.
"We've judged that the economy was undershooting our expectations. If so, there was no reason to delay taking policy action," he told a forum on Monday.
Yamaguchi said that even after last week's monetary easing, the BOJ was ready to take further action if risks to the economy grow, including from yen rises that hurt exports.
"As have been the case up till now, we'll take bold and flexible action when necessary, while scrutinizing the outlook for the economy and prices as well as risks," he said.
In a sign of how markets were already awash with extra cash, the deposits that financial institutions have parked with the central bank reached a record 44.2 trillion yen ($566 billion) on Monday, surpassing the high marked in July.
It also suggests that the money the central bank is pumping into the banking system is piling up in its reserves instead of being funneled to broader sectors of the economy, casting doubt on what more the central bank can do to stimulate growth.
WON'T DIRECTLY TARGET YEN
Japan's economy has outpaced growth of other G7 nations in the first half of this year with support from robust private consumption and spending for rebuilding from last year's earthquake.
But a recent slew of weak data, including a slump in exports and output, has cast doubt on the BOJ's forecast that Japan's economy is headed for a moderate recovery.
Yamaguchi said Japan's economic recovery will be delayed by about six months due to the prolonged slowdown in Chinese growth and the widening fallout from Europe's debt crisis, repeating a forecast made by Governor Masaaki Shirakawa last week.
"The slowdown in Chinese growth is lasting longer than expected. It's certain that the timing of (China's) exit from the slowdown will be delayed," he said.
Yamaguchi said the central bank has no intention of directly influencing yen moves, because under current law it is prohibited from intervening in the currency market.
"But that doesn't mean we do not care anything about currency moves," he said, adding that the impact of yen rises on the economy will be among factors the BOJ will consider in deciding whether to ease policy further.
He also said he has started to see some signs of weakness in private consumption, warning that domestic demand may not sustain its strength enough to make up for the slump in exports.
Many analysts had expected the BOJ to hold off on further easing policy until October, when it issues fresh long-term growth projections and makes a more thorough assessment of the economy.
But central bank policymakers were worried about a possible delay in Japan's economic recovery as early as in August, with one board member signaling the need for bolder steps to boost inflation expectations such as by influencing currency rates, minutes of the meeting showed on Monday.
($1 = 78.1600 Japanese yen)
(Additional reporting by Stanley White; Editing by Michael Watson and Richard Borsuk)