Yen appreciation poses risks to Japan's economy

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Last updated at: (Beijing Time) Wednesday, October 22, 2003

Yen appreciation poses risks to Japan's economy

The yen's recent rise and volatile long-term interest rates are short-term risks to the economy, Bank of Japan (BOJ) Policy Board member Toshikatsu Fukuma said in a speech released yesterday.

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The yen's recent rise and volatile long-term interest rates are short-term risks to the economy, Bank of Japan (BOJ) Policy Board member Toshikatsu Fukuma said in a speech released yesterday.

"The yen's real effective rate has moved sharply towards yen appreciation," he said in a talk at a private forum on October 15 released on the bank's website yesterday.

"Yen currency appreciation will deal a blow to exports... and there are concerns that it could affect corporate results," he said.

On long-term interest rates, Fukuma said that while implied volatility on forward options was lessening, it remained at high levels, indicating the market remained sensitive to future developments.

"An excessive rise in long-term interest rates would not only affect the real economy but affect the progress of banks' disposal of non-performing loans as financial institutions incur losses on their Japanese Government bond holdings," he said.

"It is to be hoped that market expectations stabilize and the market moves stably."

Fukuma said a third risk was the US economy, although higher-than-expected growth had been seen in the last two to three quarters.

But personal consumption was expected to be moderate, and the outlook for the next year was clouded by twin current account and fiscal deficits, geopolitical risks and limited leverage for stimulus after the US Government's huge tax cuts, he said.

Japan's tentative economic recovery hinges on exports to the United States and Asia as domestic demand remains reined in by structural problems.

BOJ board minutes released last Thursday showed Fukuma proposed an aggressive monetary easing at the bank's September 11-12 policy meeting as a way to ward off market instability and to clarify the bank governor's easing stance amid a rise in bond yields.

Fukuma's proposal was rejected by an eight-to-one vote.

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