October 9, 2014 / 1:32 AM / 5 years ago

IMF Shinohara says yen falls not too big, reflect U.S. fundamentals

WASHINGTON (Reuters) - Recent declines in the yen are due largely to the dollar’s strength and are not unexpectedly large when measured on a real, effective basis, a senior International Monetary Fund official said on Wednesday.

Naoyuki Shinohara, the deputy managing director of the International Monetary Fund (IMF), speaks during an interview with Reuters in Colombo November 18, 2013. REUTERS/Dinuka Liyanawatte

“What’s happening now is dollar strengthening. The U.S. economic outlook is quite favorable,” IMF Deputy Managing Director Naoyuki Shinohara told Reuters in an interview.

“The U.S. recovery is in better shape than that of other advanced economies ... Considering the direction of monetary policy, it’s natural for the dollar to rise,” he said.

Shinohara, formerly a senior Japanese finance ministry official, also said he saw no need for the Bank of Japan to ease monetary policy further, even if its price target cannot be achieved within the two-year timeframe to which the bank had committed.

With inflation expectations having heightened to around 1 percent to 1.5 percent, additional monetary easing may do more harm than good by distorting asset prices and make an exit from the ultra-loose policy even more difficult, he said.

“Inflation is still distant from the BOJ’s 2 percent target, but Japan doesn’t have to worry about returning to deflation any more,” Shinohara said.

“Under such conditions, it’s pretty difficult for the BOJ to justify additional monetary easing,” he said.

Under an intense burst of monetary stimulus deployed in April last year dubbed “quantitative and qualitative easing” (QQE), the BOJ has pledged to double base money via aggressive asset purchases to achieve its 2 percent inflation target within roughly two years.

BOJ Governor Haruhiko Kuroda has repeatedly said Japan is on track to meet the target next year, though many analysts doubt whether inflation will accelerate so quickly in a country that had been mired in deflation for 15 years. Core consumer inflation is barely above 1 percent, when excluding the effect of a sales tax hike to 8 percent from 5 percent in April.

While the IMF estimates that it will take until 2017 or 2018 for Japan’s inflation to reach 2 percent, the BOJ does not have to ease policy again just for the sake of meeting the target early next year, Shinohara said.

“What’s important is for the BOJ to communicate its policy well with markets” so that failure to meet the target within two years does not disrupt financial markets, he said.


The yen lost nearly 10 percent against the dollar in the past two months to hit a six-year low, as markets focused on the divergence of the monetary policies of the BOJ and the Federal Reserve.

Some Japanese business lobbies and lawmakers have begun to complain about the pain the weak yen inflicts on small firms and households by boosting the cost of imports.

Shinohara said it was hard to judge whether the yen’s recent sharp declines were positive or negative for Japan’s economy, but said structural changes in the economy meant the boost from the weak yen on exports was diminishing.

“Japanese companies have shifted production overseas not just because the yen was strong, but also because that’s where (promising) markets exist,” he said. “This trend won’t change easily.”

With Japan still running a current account surplus and domestic investors hesitant to shift funds to foreign assets, there are no signs of a dangerous flight of funds out of Japan, Shinohara said.

“But if the government does not steadily reduce Japan’s fiscal deficit, at some point we could see some disruptive market moves” as investors lose trust in the country’s ability to restore its financial health, he said.

Editing by Chris Gallagher and Clarence Fernandez

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