February 6, 2014 / 2:26 AM / in 4 years

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

TOKYO/MIYAZAKI, Japan (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 lackluster 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 materializes, 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 lackluster 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 program 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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