June 15, 2012 / 3:45 AM / 7 years ago

UPDATE 2-BOJ chief signals steps to shield banks from Greek risk

* BOJ keeps policy rate at 0-0.1 pct, no easing steps
    * BOJ: To do utmost to ensure banking system stability
    * BOJ revises up economic view, warns of uncertainty
    * Central banks have tools ready to offer funds-Shirakawa

    By Leika Kihara and Rie Ishiguro	
    TOKYO, June 15 (Reuters) - Bank of Japan Governor Masaaki
Shirakawa pledged on Friday to ensure the country's banking
system remains stable, signalling readiness to pump liquidity
into the market in case a Greek election in the weekend ignites
fresh turmoil.	
    Shirakawa said central banks were always in close contact
with each other and carefully watching markets, which remain
jittery on worries over the Greek election and Spain.	
    "Central banks share a common understanding that it is
important to ensure financial system stability," he said at a
news conference after the BOJ decided to keep policy settings
    "If there are worries over funding, central banks can offer
liquidity to markets" under existing frameworks such as the
Federal Reserve's dollar swap arrangement with the BOJ and other
major central banks.	
    He declined to say whether there are any plans, or
possibilities, for major central banks to take coordinated
action next week if the Greek election jolts global financial
    G20 officials have told Reuters that central banks from
major economies stand ready to take steps to stabilize financial
markets by providing liquidity and preventing a credit squeeze
if the election results cause tumultuous trading. 	
    As widely expected, the BOJ held off on increasing the size
of its main policy tool, a 40-trillion yen ($505 billion) asset
buying programme, saving its firepower in case prospects of a
Greek exit from the euro triggers a spike in the safe-haven yen.
    Shirakawa said the BOJ will do its utmost to protect Japan's
banking system, which remains stable now, suggesting that the
central bank is ready to pump huge amount of funds into the
system should markets destabilise.	
    "We're keeping an eye out on markets with extreme caution,"
he said, reiterating that Europe's debt crisis remains the
primary risk to Japan's recovery prospects.	
    Japanese banks have been relatively immune from the fallout
of Europe's debt crisis due to their limited exposure to the
region, although policymakers worry that a sell-off of global
shares, if too big and sharp, would hit their balance sheets.	
    Tokyo is quietly drawing up contingency plans to protect its
economy in case Sunday's elections heighten prospects for Athens
to leave the euro zone. The first line of defense for the BOJ
would be fund injections to calm Tokyo's markets.	
    The BOJ and other central banks also have a dollar-swap
arrangement with the Fed with the latest extention of the deal,
which allows them to tap unlimited amount of dollars, to run to
February 2013.	
    The BOJ revised up its assessment on Japan's economy to say
it is starting to pick up, convinced that robust private
consumption and rebuilding from last year's earthquake will
offset some of the pain from slowing global growth.	
    But it warned that global uncertainty runs high as Europe's
debt crisis keeps markets on edge, suggesting that it will offer
further stimulus if risks to Japan's recovery heighten.	
    For Japanese policymakers, the biggest fear is that a fresh
wave of global risk aversion could see investors flock to the
yen and force it to a fresh record high above 75.31 per dollar,
hurting the export-reliant economy.	
    If that happens, the central bank would probably increase
the size of its asset-buying programme, said sources familiar
with the bank's thinking.	
    "If the yen shoots up and stock prices fall, the BOJ may
hold an emergency meeting to increase government bond purchases
and buy bonds with longer dates until maturity," said Yuichi
Kodama, economist at Meiji Yasuda Life Insurance in Tokyo.	
    "But any such action by the BOJ alone probably won't contain
market turmoil," he said, adding that it may take concerted
easing by U.S. and European central banks to calm markets.	
    The BOJ eased policy in February and set a 1 percent
inflation target to underline its resolve to reinflate an
economy beset by deflation for much of two decades. It relaxed
policy again in April but has paused since then on the view that
Japan's economy is headed for a moderate recovery.	
    Many market participants expect the central bank to ease
again in July, if not earlier, when it issues revised quarterly
economic forecasts that may show an end to deflation is far.	
    Japan's economy is expected to outperform most of its G7
peers this year with growth of around 2 percent, helped by
reconstruction spending following last year's earthquake.
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