UPDATE 1-Japan defends stimulus, yen policy under fire

Sat Jan 26, 2013 11:33am EST

* Japan economy minister says not trying to weaken yen

* Amari says no breach of central bank independence

* South Korea central banker criticises Japan policy

* IMF chief urges medium-term debt reduction plan

By Lisa Jucca and Kelvin Soh

DAVOS, Switzerland, Jan 26 (Reuters) - Japan's economy minister rejected criticism on Saturday that his country's extraordinary fiscal and monetary stimulus programme was aimed at weakening the yen and undermined central bank independence.

Akira Amari told the World Economic Forum in Davos it was up to the market to determine the currency's exchange rate, and the Bank of Japan had chosen independently to sign a joint statement with the government on actions to fight deflation and revive economic growth.

"You might think there's a deliberate policy to drive down the value of the yen but we in government refrain from commenting on the exchange rate of the yen," Amari said in response to criticism of Japanese action.

South Korea's central bank governor questioned the efficacy of Japan's easing of monetary policy and said the BOJ's decision to start buying unlimited amounts of assets in 2014 could have unintended long-term consequences.

"What they did created a couple of problems," Bank of Korea Governor Kim Chong-soo told Reuters in an interview in Davos. "One is that the level (of the currency) is affected, and the pace of change is also a problem. They did it too hastily."

A stable exchange rate is key for the Bank of Korea, Kim added.

The yen has come under pressure since reports on Thursday quoted deputy economy minister Yasutoshi Nishimura as saying the yen's decline was not over, and that a dollar/yen level of 100 would not be a concern.

The Japanese currency is now trading around a 2-1/2 year low against the dollar at around 90 yen, as the market remained focused on Japan's pursuit of a reflationary economic policy.

BREAK CYCLE OF DEFLATION

Amari said the government and the BOJ had agreed on exceptional measures because Japan had to break a prolonged cycle of deflation and economic contraction.

Appearing on the same panel, International Monetary Fund Managing Director Christine Lagarde refrained from direct criticism but urged Japan to put forward a medium-term plan to reduce its public debt after this week's measures.

"Japan has made very important decisions. We are very interested in these policies. We would like them to complement it with a mid-term plan on how the debt would be reduced," Lagarde said.

Japan's debt stood at 235 percent of gross domestic product before new Prime Minister Shinzo Abe announced a new deficit-financed stimulus programme this month. The BOJ said it was doubling its inflation target to 2 percent and would take new monetary stimulus measures.

Appearing on the same panel, Canadian central bank chief Mark Carney, soon to take over as governor of the Bank of England, said the Japanese policy as outlined did not breach the Group of Seven industrial nations' policy understanding against unilateral currency intervention.

However a European Central Bank source, speaking on condition of anonymity, said the ECB was "not very happy" at what was seen as a step towards competitive devaluations and the Group of 20 major economies' finance ministers and central bankers should address the issue next month.

"I guess this is a G20 issue that needs to be addressed there. It is potentially dangerous and we should avoid (currency wars)," the source said.

"It's not a problem yet. But if they (Japan) continue in that direction and we see also what's happening with quantitative easing in the United States and Britain, then we would be the only one who would not follow suit.

"The risk is that this would indeed have an effect on the exchange rate and that we would get into a dangerous situation," the ECB source said.

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Comments (2)
I seem to recall that recently, the Japanese govt announced that they would not stand by idly and let the US and the EU weaken their currencies without Japan taking similar action. In other words, Japan can say all they want about this being a stimulus program but in fact, they are deliberately weakening their currency to try to gain an international trading advantage — and to increase inflation at home.

Jan 26, 2013 4:59pm EST  --  Report as abuse
herestp wrote:
Yen is just like any other commodity. More in circulation = less value. The buyer (USD $ seller), perceiving a weaker yen due to more in circulation will demand more yen in exchange for his dollar to maintain the same purchasing power of real products/services as before. Thus in order for the yen to be bought, the yen seller have to cough out more. Whereas it was say USD$1 = 75 yen, now it is USD$1= 90 yen to complete the transaction. Repeat this for the Korean Won, Euro and all freely convertible currencies and you see this affects the competitive export advantage of their countries. This sounds like an roundabout way of currency manipulation, so why is Japan trying to hookwink the world?

Jan 27, 2013 11:40am EST  --  Report as abuse
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