UPDATE 3-BOJ officials signal readiness to act, warn of emerging market risks

Thu Feb 6, 2014 2:03am EST

Related Topics

* Emerging markets rout affecting Japan markets - BOJ's
Nakaso
    * Adds will adjust policy if risks threaten price target
    * BOJ's Iwata blames weak ASEAN growth for soft exports
    * Iwata sees risks small for now, no need for immediate
easing

 (Adds Iwata quotes from briefing)
    By Leika Kihara
    TOKYO/MIYAZAKI, Japan, Feb 6 (Reuters) - The Bank of Japan
stands ready to expand monetary stimulus further if necessary to
safeguard its inflation mandate, two top policymakers said on
Thursday, warning that the rout in emerging markets was already
affecting Japanese assets.
    Deputy Governor Kikuo Iwata dismissed the chance of an
immediate expansion of monetary stimulus, stressing that solid
U.S. growth will underpin global demand and keep the world's
third-largest economy on track for a moderate recovery.
    "I am not too worried about the U.S. economy and therefore
in terms of Japan's monetary policy I think we can stick to our
existing policy," he told a news conference after meeting with
business leaders in Miyazaki, southern Japan.
    But the former academic, echoing concerns expressed by
Governor Haruhiko Kuroda that lacklustre growth in emerging Asia
is weighing on exports, stressed the BOJ's readiness to act
should external risks undermine its inflation target.
    After nearly a year of monetary and fiscal stimulus roused
the world's third-biggest economy from decades of slumber, the
concern among some in the BOJ is that trouble elsewhere could
undermine the hard-won progress.
    "Financial markets, including those in emerging economies,
are making jittery movements," Hiroshi Nakaso, the other BOJ
deputy governor, told parliament on Thursday.
    "If some kind of risk materialises, we will take necessary
policy adjustments to ensure achievement of our 2 percent price
target," said Nakaso, a career central banker with deep
expertise on global affairs.
    Nakaso warned that the sharp selloff in emerging market
currencies, triggered in part by the U.S. Federal Reserve's
tapering of its massive stimulus, has already affected Japan by
lifting the safe-haven yen and hurting equities.
    Still, both deputy governors stuck to the BOJ's upbeat view
that overseas economies will recover over time, despite the
recent sell-off reflecting concern that growth in advanced
nations may fail to offset the emerging market slowdown.
    Iwata also sought to dispel market speculation the BOJ may
pre-empt the damage from a sales tax hike in April with
additional easing, saying that Japan can withstand the pain from
the higher tax as exports and capital spending increase.
    "Some people see downside risks (to the economy) as pretty
big, but I see them as relatively small," he said.
    Investors are waiting for the next trigger after a currency
crisis in Argentina, signs of slowing growth in China and the
withdrawal of U.S. monetary stimulus hit emerging markets,
prompting abrupt interest rate rises in deficit-laden India,
South Africa and Turkey.
    The selloff in emerging markets pushed the safe-haven yen to
multi-month highs, boding ill for Japan's economy that needs
stronger growth in exports to make up for an expected drop in
household spending after the sales tax hike in April.
    
    SLUGGISH EXPORTS
    Markets have scaled back expectations of immediate BOJ
easing after Kuroda last month voiced confidence that his price
target can be achieved without additional stimulus.
    Iwata's remarks put him among those in the nine-member board
relatively confident about Japan's economic prospects. They run
counter to the views of board pessimists such as former
International Monetary Fund economist Sayuri Shirai, who worry 
faster inflation and the higher sales tax may hit consumption
harder than expected.
    Recent data pointed to an economy that continues to pick up
momentum on strong domestic demand, driven by Prime Minister
Shinzo Abe's massive fiscal and monetary stimulus.
    Some BOJ officials, however, worry about lacklustre growth
in exports. Iwata echoed that view, saying sluggish growth in
ASEAN economies, which have close ties with Japan, was largely
behind soft exports.
    "But we expect these economies to gradually gain momentum in
the long-term as the recoveries in the United States, Europe and
China start to spread," he said, adding that exports will
gradually increase as global demand recovers.
    Exports to Asia as a whole make up more than half of
Japanese shipments, with the ASEAN block taking up one seventh
of the total.
    The BOJ has kept monetary policy steady after offering an
intense burst of stimulus in April last year, pledging to double
base money via aggressive asset purchases to spur inflation to 2
percent in roughly two years.
    The central bank has said the current stimulus programme is
enough to achieve the price target and that it will not respond
to any temporary slump in the economy.
    Japan's core consumer inflation rose at the fastest pace in
more than five years in December, a promising sign that the
central bank's inflation goal was within reach.
    Iwata said the BOJ won't end its ultra-easy policy unless 2
percent inflation is achieved in a stable manner, reassuring
markets that briefly meeting the target won't automatically
prompt the bank to start withdrawing stimulus.

 (Reporting by Leika Kihara; Editing by Dominic Lau & Shri
Navaratnam)
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