UPDATE 3-BOJ’s Suda says buying more risk assets an option

* Buying foreign bonds an option although chance small -Suda

* Strong chance of Japan GDP contraction in Q4 -Suda

* Japan may stay in deflation longer than BOJ forecast -Suda

* Need to keep eye on Europe’s sovereign debt woes -Suda
(Adds quotes from news conference)

By Leika Kihara

YAMAGATA, Japan, Dec 1 (BestGrowthStock) – Bank of Japan policy board
member Miyako Suda said expanding purchases of risk assets is an
option in the central bank’s policy arsenal as prolonged economic
weakness threatens to delay Japan’s exit from deflation.

Suda, who opposed buying government bonds with the BOJ’s
asset buying fund, also said including foreign bonds in the
scheme’s targeted list of assets was a possibility, although she
stressed that the chance of this was very low.

“Buying risk assets cannot be categorised as traditional
central bank policy,” Suda told a news conference after meeting
with business leaders in Yamagata, northern Japan, on Wednesday.

“But I have in mind the possibility of expanding purchases
taking into account the costs and benefits.”

Suda offered the bleakest view on the economy to date by a
central bank policymaker, saying that anaemic growth may keep
Japan in deflation longer than the BOJ’s current forecast.

She also warned of lingering downside risks to the
export-reliant economy, including market jitters over Europe’s
sovereign debt woes.

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More stories on Japan’s economy [ID:nECONJP]

Interactive timeline on the Eurozone debt crisis in 2010:

http://link.reuters.com/nyx95q

Take a Look on euro debt crisis: [ID:nLDE68T0MG]

Multimedia coverage on the Euro Zone Crisis on Top News:

http://r.reuters.com/hus75h

Graphic on debt crunch: http://r.reuters.com/zem66q

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

RISK ASSETS

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, but they have offered few
clues on what kind of additional assets it would buy.

“The BOJ apparently is examining all types of risk assets as
possible targets for its asset buying scheme, but Suda’s comments
suggest there are no specific plans at present,” said Masamichi
Adachi, senior economist at JPMorgan Securities Japan.

Suda said buying more risk assets, rather than government
bonds, made more sense if the BOJ were to boost its asset buying
fund, reflecting her opposition to including government bonds in
the list of assets targeted in the fund.

But some market players doubted whether the BOJ was ready to
take on more risk. Markets for private assets targeted in the
fund are still small, meaning the realistic option would be to
buy more government bonds.

“Suda prefers buying risky assets to government bonds
probably since she distrusts the government’s fiscal management.
She thinks increasing the BOJ’s purchases of government bonds
will lead to looser fiscal discipline,” said Naomi Hasegawa,
senior strategist at Mitsubishi UFJ Morgan Stanley Securities.

“But it is unlikely the BOJ will buy more types of risk
assets given that Suda’s view is not a majority of the BOJ.”

Suda, a former economics professor, is the longest-serving
member of the current board. Her term expires in March next year.

On deflation, Suda said she did not see a strong chance of
annual falls in core consumer prices ending by March 2012, as
forecast in the BOJ’s long-term economic outlook report.

While Suda is known as the most pessimistic about the economy
on the nine-member board, some market players said her comments
could signal the chance of a downward revision in the BOJ’s price
forecasts when it reviews them in January.

The BOJ currently forecasts core consumer prices to rise 0.1
percent in fiscal 2011/12 and gain 0.6 percent in the following
year to March 2013. Many analysts have criticised the estimates
as too optimistic given weak domestic demand.

Japan’s economy is expected to contract slightly in the final
quarter of this year as exports and factory output weaken due to
slowing overseas growth, analysts say. But many of them expect
the country to escape recession given solid demand for Japanese
goods in fast-growing Asia.
($1=83.57 Yen)
(Additional reporting by Rie Ishiguro, Tetsushi Kajimoto and
Kaori Kaneko; Editing by Edmund Klamann)

UPDATE 3-BOJ’s Suda says buying more risk assets an option