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UPDATE 2-BOJ sees global damage if U.S. debt ceiling is not raised
October 9, 2013 / 3:28 AM / in 4 years

UPDATE 2-BOJ sees global damage if U.S. debt ceiling is not raised

* BOJ deputy governor upbeat on Japan's economy
    * Adds global economy to pick up, warns of uncertainty
    * BOJ's policy an "ambitious approach in uncharted waters"
    * Nakaso says see no immediate need for more BOJ easing

    By Leika Kihara
    MATSUE, Japan, Oct 9 (Reuters) - Global stocks could plunge
and long-term interest rates rise, dealing a severe blow to the
global economy, if U.S. politicians do not reach a deal to raise
their debt ceiling by mid-month, Bank of Japan Deputy Governor
Hiroshi Nakaso said on Wednesday.
    The warning followed similar comments by the finance
minister on Tuesday, signalling Tokyo's worries about the impact
on its holdings of more than $1 trillion of U.S. Treasury bonds
if the political deadlock is not resolved soon. 
    Nakaso said the standoff was the biggest uncertainty for the
U.S. economy, which is otherwise enjoying solid growth driven by
robust private demand, and a risk to the global economy.
    "A prompt resolution of the fiscal consultation issue is
critical for the global economy, including Japan," he said in a
speech to business leaders in Matsue, western Japan.
    Redemption and interest payments of U.S. government debt
will stop if the debt ceiling was not increased by October 17,
which could lead to a U.S. credit rating downgrade, he said.
    "If that happens, it would have a significant adverse effect
on the global economy" by triggering a spike in long-term
interest rates, a plunge in stock prices and fluctuations in
currency rates, said Nakaso, a career central banker who became
one of the BOJ's two deputy governors in March.
    Outside the U.S. risks, Nakaso was upbeat on Japan's
economic outlook, saying the positive momentum seen in wages and
household income will continue to support personal spending.
    Exports were expected to gain strength as overseas economies
picked up, which would help sustain Japan's recovery, although
he cautioned emerging economies would remain pressured by
capital outflows due to investor expectations the U.S. Federal
Reserve could soon taper its massive asset-buying stimulus.
    "Global economic uncertainty remains high so we would like
to continue monitoring developments closely," he told a news
conference after his speech.
    On Tuesday, the International Monetary Fund cut its world
growth forecasts for the sixth straight time in less than two
years, saying a stronger performance in most advanced economies
would fail to make up for a more sluggish expansion in the
developing world. 
    The BOJ launched its own intense burst of monetary stimulus
in April, pledging to double the base money via aggressive asset
purchases to achieve its 2 percent inflation target in roughly
two years.
    Nakaso described the policy as an "extremely ambitious
approach in uncharted waters" since it attempted to
intentionally lift inflation expectations in a country mired in
deflation for decades.
    Nakaso, who has voted with the majority of the board on
policy since assuming his post, was confident it would succeed,
saying he expected consumer inflation to reach 2 percent during
the latter half of fiscal 2014 through fiscal 2015.
    The BOJ raised its assessment of the world's third-largest
economy last month to say it was "recovering moderately,"
reflecting strong growth in the second quarter and improvements
in business sentiment.
    Minutes of the BOJ's policy meeting in September showed 
board members agreed a virtuous cycle spanning from production
to income and spending was functioning well. 
    Policymakers hope overseas growth will pick up in time to
make up for an expected downturn in personal consumption after
Japan raises its sales tax rate in April next year.
    Nakaso saw no immediate need to loosen monetary policy
further, reiterating the central bank's view the economy can
absorb the tax hike without additional monetary stimulus.
    "We'll of course make necessary policy adjustments to
achieve our price target if external or domestic risks force us
to alter our economic and price projections," he said.

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