Europe crisis poses more risks to recovering Japan

NAHA - Reuters

A robot system is seen at an exhibition in Tokyo yesterday. The country’s exports may be affected by problems in the supply chain, Bank of Japan says. AFP photo

Risks to Japan’s export-reliant economy have heightened even after last month’s monetary easing, Bank of Japan board member Seiji Nakamura warned yesterday, preparing markets for further action to assist with the country’s sluggish recovery.
Nakamura said the strong yen and Europe’s debt crisis were clouding the outlook while the severe flooding in Thailand was likely to dent Japanese factory output by hurting exports to the country and disrupting supply chains in Asia.
Doubts over Europe’s ability to contain the debt crisis have jolted markets and pushed the yen to record highs on safe-haven demand.
Japanese policymakers worry the yen’s rise could stall export growth and damage an economy emerging from recession after the devastating March earthquake.
“Many Japanese companies have strived to overcome various supply constraints from the March earthquake, and are just about to swing to full production to recover market share lost at home and overseas,” Nakamura told business leaders in Naha, southern Japan, yesterday.
“Slowing overseas growth and yen rises at such a time would weigh on business sentiment by hurting revenues mainly for exporters,” he said.
The cautious tone of his remarks underscores the central bank’s readiness to offer further monetary stimulus, even after easing policy last month, if Japan’s recovery is threatened. Nakamura, formerly head of a freight firm unit, warned that Europe’s lingering debt crisis and the possibility of a longer than expected U.S. slowdown were also key risks to the outlook.

Sensitive markets
“Developments in Europe’s debt crisis are highly uncertain and a final solution may take a long time to reach,” he said.
“Markets are very sensitive to negative factors in Europe,” he added, stressing the need to guard against the tail risk --events that rarely happen but when they do have a huge impact on the economy-- of the debt woes triggering a global crisis.
Japan intervened in the currency market days after the BoJ eased monetary policy on Oct. 27 to soften the impact of the yen’s rise to record highs against the dollar.
But the effect is wearing off with the yen crawling back near levels before the intervention.
The central bank is expected to pause when its board meets next week but only on condition that developments in Europe do not deteriorate enough to spark another spike in the yen.
“I get the impression Nakamura is stressing risks to the economy,” said Koichi Haji, chief economist at NLI Research Institute in Tokyo.
“The BoJ will probably be forced to take further action if the yen appreciates sharply again, and depending on developments in Europe and the United States,” he said.