Central Bank - Bank of Japan to monitor global economy, markets more closely - UPDATE

Fri, Feb 15 2008, 09:56 GMT
http://www.afxnews.com

TOKYO (Thomson Financial) - Japan's central bank will assess the downside risk to the economy more closely as global financial markets have continued to display signs of instability and the global economic outlook is still uncertain, Bank of Japan governor Toshihiko Fukui said Friday.

But the Japanese economy is still on the path to recovery, said the top BoJ official, seeming to suggest that the central bank wants to resume its interest rate adjustments when the situation allows it.

"Judging from the development in the forex and stock markets, investors are still risk averse," Fukui told a press briefing after the central bank's two-day policy board meeting.

Fukui also noted that global financial and capital markets are still in the process of repricing risks.

He said the global economy needs to undergo a correction, "which may take some time to complete."

Fukui cited the continued downgrade of credit ratings at major US and European financial institutions, including bond insurers, as well as rising write-downs and losses at those financial institutions as evidence of the continuing instability in financial markets.

He also said it is essential for G-7 countries to share the responsibility of helping financial markets complete the risk-repricing process "in an orderly manner" by taking country-specific actions.

Turning to the US, Fukui said the slowdown in the world's largest economy is intensifying, with the moderation in consumer spending becoming clearer.

"In addition, financial institutions are tightening their stance towards extending new credit, which may affect the economy further," he said.

"And if the slowdown in the US economy intensifies further, it may pose some downside risk to other economies, which are enjoying high growth," said Fukui.

Production to sustain growth

Fukui is relatively optimistic about the outlook for the Japanese economy.

"With the virtuous cycle of growth in production, income and spending still intact, as a whole, I continue to believe that the possibility is high that the Japanese economy will achieve sustained growth under a stable price environment," he said.

"But at the same time, we are seeing some weakness in the function of the virtuous cycle," he said.

Fukui also warned of the near-term trend of industrial output.

"Given the fluctuating IT demand and the expected downturn (in) automobile (output) following robust production, industrial output is likely to be flat in the near term," Fukui said.

Japan has been relying on the strength of its industrial production to achieve economic recovery in recent years.

"But as shipments and inventories are well balanced, the underlying rising trend remains intact (in the long term)," said Fukui.

In a recent forecast, the Ministry of the Economy, Trade and Industry said industrial output was expected to drop by 0.4 percent in January from December, and decline by another 2.2 percent in February from January. This is the first time since January 2005 that the industrial output index was forecast to decline for more than a month.

Japan out of deflation

Fukui also said Japan's economy is no longer in a state of deflation.

"Once Japan overcomes the current challenges, it will return to the potential growth pace and if this happens, the core consumer price will start rising stably, in line with an improvement in supply and demand, rather than higher energy and food prices," Fukui said.

"From this viewpoint, Japan has overcome the deflation spiral a long time ago," he said.

His comments came after government data showed that the GDP deflator, the broadest gauge of deflation, fell 1.3 percent in the quarter to December from a year earlier, bigger than the 0.6 percent drop in July-September.

"As a whole, uncertainties about the global economy are increasing while the financial market turmoil shows no signs of easing. In addition, the Japanese economy is slowing down largely due to the drop in housing starts," said Fukui.

"Under these circumstances, we will assess economic indicators at home and abroad, as well as the upside and downside risks more closely and we will make the appropriate policy decisions at the appropriate time," he said.

Fukui said he has no immediate plan to "dramatically slash" the amount of Japanese government bonds the central bank purchases from the market monthly. The BoJ currently buys up to 1.2 trillion yen worth of bonds a month.

"When the need arises, we will take the necessary action, but when we do so, we will carry it out in a predictable manner," Fukui said.

Asked if the recent rise in core CPI has strengthened the effects of the low interest rate environment, Fukui said he does not think so, but added that Japan's monetary conditions have been accommodative for some time.

(1 US dollar = 108.07 yen)