BOJ newcomer upbeat on economy

By Leika Kihara and Rie Ishiguro

SAITAMA/TOKYO, Japan (BestGrowthStock) – Japanese bond yields have not risen enough to seriously harm an economy that is set to resume an export-led recovery, a Bank of Japan policymaker said, suggesting more monetary easing is not imminent.

Yoshihisa Morimoto, a former utility executive who joined the central bank’s board in July, also sounded cautious about the BOJ buying more risk assets, a sign that he may prefer government bonds to private debt if the central bank were to top up its asset buying fund.

While warning of the potential market fallout from Europe’s debt woes, he said risks to Japan’s economy were roughly in balance, with growth seen recovering next year on a rebound in exports.

“Exports are unlikely to falter, because of strong demand in emerging nations, and will therefore support Japan’s economy in a relatively long-term perspective,” Morimoto said in a speech to business leaders in Saitama, near Tokyo on Thursday.

The comments came after data showed on Thursday that Japan’s economy grew a revised 1.1 percent in July-September from the previous quarter, exceeding an initial government estimate and beating U.S. growth of 0.6 percent in the same period.

But that offered little comfort to policymakers wary of an expected contraction in the final quarter of this year, as factory output slumps with a slowdown in overseas growth and weak car demand after an end to government subsidies.

The BOJ eased policy in October by pledging to keep interest rates effectively at zero until the end of deflation was in sight and by crafting a 5 trillion yen ($60 billion) pool of funds to buy assets ranging from government bonds to corporate debt, including trust funds investing in stocks and property.

BOJ policymakers have repeatedly said that increasing the size of the fund would be a clear option if the looming economic slowdown proves worse than expected, a view Morimoto echoed.

BOJ SEEN ON HOLD

But with the yen having stabilized after rising to a 15 year high against the dollar, the BOJ is widely expected to hold off on expanding the pool at its policy review later this month.

Of the 5 trillion yen fund, the BOJ plans to spend 3.5 trillion yen buying short-term government securities and one- to two-year government bonds with the aim of pushing down yields.

But JGB yields have recently surged to multi-month highs in tandem with gains in U.S. Treasury yields, drawing some criticism in the market that the BOJ’s bond buying was insufficient.

Morimoto countered that the BOJ had only just started buying assets under the scheme and that more time was needed to measure its effect on the economy and the markets.

“At present, I don’t think the rise in long-term interest rates is having a big negative impact on the economy,” Morimoto told a news conference.

He also said that, if the BOJ were to expand asset buying, it should ensure the drawbacks of buying risk assets was minimized.

“The markets for exchange-traded funds (ETFs) and real estate investment trusts (REITs) are small … We also need to take into account the need to restore the health of the BOJ’s finances,” Morimoto said.

Some market players took the remarks as signaling BOJ hesitancy toward expanding purchases of risk assets.

“Morimoto was speaking in line with the BOJ’s mainstream view that there would be limits to boosting purchases of risk assets such as ETFs and REITs given the relatively small size of those markets,” said Seiji Shiraishi, chief economist at HSBC Securities Japan.

“This means the BOJ would opt to boost its JGB purchases if it increases the size of its asset buying fund. Rises in long-term interest rates would also justify such a move.”

Sources have told Reuters that any topping up of the BOJ’s new asset pool would come mainly in the form of government bonds.

The five-year JGB yield rose to an eight-month high and the benchmark 10-year yield climbed to its highest since June on Wednesday.

Yields eased in early Thursday trade but climbed again after Morimoto’s comments, and the market’s instability is adding to the woes of the fragile Japanese economy.

Analysts polled by Reuters expect Japan’s economy to shrink 0.1 percent this quarter as exports slow and auto output slumps after the expiry of government incentives for purchases of low-emission cars.

But many expect the economy to recover next year on the back of solid demand in fast-growing Asian nations.

BOJ Governor Masaaki Shirakawa has said risks to Japan’s economy were roughly in balance, while other board members such as Miyako Suda have warned that risks were tilted more toward the downside as exports and output weaken.

Little has been known on the policy stance of Morimoto, a former senior executive at Asia’s biggest utility Tokyo Electric Power Co (9501.T: ). Thursday’s event marked his first public appearance since a debut news conference in July.

($1=83.99 Yen)

(Additional reporting by Kaori Kaneko; Editing by Edmund Klamann and Sanjeev Miglani)

BOJ newcomer upbeat on economy