WRAPUP 1-BOJ Suda warns Europe debt woes may hurt Japan

(For more stories on the Japanese economy, click [ID:nECONJP])

* BOJ Suda says focusing more on downside risks to Japan

* Adds stock, currency markets very unstable

* Warns boosting fiscal spending in Japan may backfire

* Capex survey points to downward revision in 1Q GDP

By Leika Kihara

WAKAYAMA, Japan, June 3 (BestGrowthStock) – Bank of Japan policy
board member Miyako Suda said she was focusing on downside risks
to Japan’s economy even as it recovers, warning that the market
turmoil triggered by Europe’s debt woes could hurt growth.

Suda, a former economics professor and the longest sitting
member of the board, also warned that expanding government
spending in Japan could damage market trust and backfire as the
country is already saddled with a huge public debt.

Lawmakers from the ruling Democratic Party will pick a new
leader and prime minister on Friday after Yukio Hatoyama resigned
this week, and a key challenge to whoever takes over will be how
to rein in debt. [ID:nTOE652014]

Strong exports to Asia and stimulus-driven consumption helped
Japan’s economy grow 1.2 percent in the first quarter of this
year, outpacing U.S. and euro-zone growth during the same period.
[ID:nTOE64J003]

But Suda warned that fiscal problems in Europe will take a
long time to fix, with the ensuing market turmoil and slowing
euro-zone growth clouding Japan’s economic outlook, offering the
most pessimistic view to date from a BOJ policymaker.

“Stock and currency markets are very unstable, and as a
result not only Europe but also Japan may see a negative impact
on consumption and capital spending via a worsening of household
and business sentiment,” Suda told business leaders in Wakayama,
western Japan. [ID:nTOE65202T]

A government survey released on Thursday showed that while
annual declines in corporate capital spending narrowed in the
first quarter, the pace of improvement was slower than economists
expected. [ID:nTOE64U093]

The data means gross domestic product (GDP) for the quarter,
due on June 10, may be revised down from the preliminary estimate
of 1.2 percent growth.
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Suda offered few clues on the outlook for monetary policy,
only saying that the central bank will maintain very easy
monetary policy in an effort to pull Japan out of deflation.

But she said central banks should not give markets the
impression they could directly underwrite government debt, in a
sign the BOJ was sticking to its reluctance to increase its
outright government bond buying.

Naomi Hasegawa, a senior fixed-income strategist at
Mitsubishi UFJ Morgan Stanley Securities, said Suda’s cautious
tone is a sign the BOJ is mindful of the impact Europe’s debt
problems may have on Japanese business sentiment.

“The BOJ will try to find out the degree of impact in its
next tankan survey” due out next month, Hasegawa said.

The BOJ has kept interest rates at 0.1 percent, and eased
monetary policy in December 2009 and again in March by setting up
and later expanding a facility offering cheap funds to banks.

It also outlined last month a new loan programme aimed at
encouraging banks to lend more to industries with growth
potential. [ID:nSGE64K0AS]

Suda was one of the two dissenters in the BOJ’s decision in
March to double the size of a fund supply operation aimed at
pushing down money market rates. She has voted with the board
since then but has repeatedly warned of the drawbacks of keeping
monetary policy loose for too long.

The BOJ upgraded its assessment of the economy last month to
say it was starting to recover, while BOJ Governor Masaaki
Shirakawa has said he saw growing signs of a sustained recovery
in domestic demand.

Stock Market Research Tools
(Additional reporting by Hideyuki Sano; Editing by Charlotte
Cooper)

WRAPUP 1-BOJ Suda warns Europe debt woes may hurt Japan