MAEBASHI, Japan The slumping yen has already buoyed Japanese equities and could help spur price rises driven by economic growth, Bank of Japan policymaker Takehiro Sato said on Wednesday, stressing that he would continue to seek ways to indirectly influence exchange rates through monetary policy.
But Sato, an economist who joined the board in July last year, dismissed calls for the BOJ to buy more risky assets, warning that doing so could expose its balance sheet to huge losses and hurt market confidence in the yen.
He also stressed that the central bank was not trying to directly push down the yen with a specific level in mind.
"By easing monetary policy through increased asset purchases ... the BOJ is aiming to lower interest rates and make the yen less attractive as a safe-haven currency," he said at a news conference on Wednesday after meeting business leaders in Maebashi, a city in the eastern Japanese prefecture of Gumma.
While arguing against adding more risk to the BOJ's existing programme of asset buying, but still wanting to reduce the yen's safe-haven appeal, Sato appears to be promoting his preferred policy of buying foreign bonds.
Since joining the board he has called for the BOJ to consider buying foreign bonds, not necessarily on its own but possibly through a joint pool of funds with the government, as an indirect way to help weaken the yen.
Sato stressed in Wednesday's speech that in order for such an idea to materialise, Japan must first seek consensus from overseas monetary authorities as it "could pose problems in terms of currency diplomacy."
Earlier on Wednesday, the yen slumped to a 33-month low against the dollar, bolstering Tokyo share prices, on expectations that the BOJ will embark on bolder stimulus measures when incumbent Governor Masaaki Shirakawa steps down in March.
Chief Cabinet Secretary Yoshihide Suga, speaking to reporters, acknowledged on Wednesday he was also keeping an eye on recent currency moves, although he too declined to name a particular level.
The yen's steep decline has raised fears of a global currency war as other major exporting nations seek to keep their goods competitive amid a backdrop of still-sluggish international demand. Policymakers in South Korea, Germany and elsewhere have expressed concern over the potentially destabilising global impact of the BOJ's decision to quicken the pace of money creation.
The BOJ has pledged to pump 101 trillion yen ($1 trillion) via its asset buying and lending programme, its key monetary easing tool, this year and has made an open-ended commitment to continue buying assets from next year.
Sato laid out the challenges of force-feeding money to markets already awash with cash. The balance of current account deposits financial institutions park with the BOJ may reach 90-100 trillion yen, double the record amount set last year, as a result of the BOJ's aggressive asset purchases, he said.
The BOJ may eventually have to offer funds at a lower rate to draw enough bids for its market operations, Sato said. But he was cautious about scrapping a 0.1 percent interest the BOJ pays to excess reserves parked at the central bank, which effectively serves as a floor for money market rates and keeps them from falling to zero.
"It's a future policy option but I'd like to scrutinise more the pros and cons of such a step," he said.
BOJ board member Koji Ishida proposed scrapping the 0.1 percent floor on interest rates in December last year, which was defeated by a 1-8 vote.
($1 = 93.3950 Japanese yen)
(Editing by Shinichi Saoshiro, Kim Coghill and Eric Meijer)