WRAPUP 3-BOJ deputy gov says watching FX; yen level not key

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

* Yamaguchi says won’t peg policy to specific yen level

* Yen rise impact on business mood depends on pace, length

* Yamaguchi repeats Japan economy on track for recovery

* Warns of risks such as European debt woes, unstable markets

* Leaves room for more steps to boost Japan growth potential
(Adds quotes from news conference)

By Leika Kihara

TOYAMA, Japan, July 21 (BestGrowthStock) – Bank of Japan Deputy
Governor Hirohide Yamaguchi said the central bank was watching
currency moves carefully but shrugged off any suggestion that yen
rises to a specific level would trigger further monetary easing.

Yamaguchi, a career central banker whose views are thought to
be close to those of Governor Masaaki Shirakawa, acknowledged he
saw recent exchange rate moves as yen strengthening, and that
such moves would affect Japanese exports.

But how Japan’s business mood was affected by rises in the
yen largely depended on how long the gains persisted and how
quickly it rose, and specific currency levels were not the
problem, he said.

“We are undoubtedly watching current exchange-rate moves
carefully,” Yamaguchi told a news conference after meeting
business leaders in Toyama, central Japan, on Wednesday.

“Having said that, the BOJ has not and will not guide
monetary policy with a specific currency level in mind.”

The dollar hit a seven-month low of 86.27 yen (JPY=: ) last
week, putting the focus on whether the BOJ may further ease
policy in an effort to curb yen strength.

The fall took the dollar close to a 14-year low of 84.82 yen
set in November, but it has since recovered to 87.20 yen.

While yen moves alone are unlikely to trigger an immediate
policy response by the BOJ, sharp yen gains accompanied by stock
market falls deep enough to threaten the economy’s recovery could
lead to further monetary easing, analysts say. [ID:nTOE667043]

Masamichi Adachi, a senior economist at JPMorgan Securities
Japan, said the yen’s recent appreciation had been gradual.

“But the BOJ’s thinking is likely to change quickly if the
yen strengthens to around 85 to the dollar and global share
prices tumble by 5-10 percent,” Adachi said.

“As Yamaguchi suggested, the global economic recovery is
fragile and Japan is vulnerable to external shocks. If such
shocks affect Japan’s markets and business sentiment, this is
likely to prompt the BOJ to take further easing steps.”

The government, its hands tied by Japan’s huge fiscal debt,
has repeatedly leaned on the central bank to support an economy
plagued by deflation, even as other central banks rolled back
stimulus steps put in place during the global financial crisis.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Graphic of deflation forecast http://r.reuters.com/zex57m
Graphic of CPI http://r.reuters.com/sum93m
Highlights of Yamaguchi’s speech [ID:nTOE66K02J]
More stories on the Japanese economy [ID:nECONJP]
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MORE STEPS?

The BOJ, which has kept interest rates at 0.1 percent since
late 2008, eased policy further by putting in place a cheap loan
programme in December 2009 amid pressure from a government
worried about the yen’s surge to the 14-year high against the
dollar. It expanded the scheme in March.

Yamaguchi stuck to the bank’s upbeat view of Japan’s economy,
saying it was on track for a moderate recovery, but warned that
Europe’s debt problems and ensuing market instability continued
to cloud the outlook.

Concern over the fallout from market volatility was shared by
other BOJ policy-makers, with a few of them saying in June that
unstable share prices could hurt Japanese consumer sentiment,
minutes of their June meeting showed. [ID:nTOE66K004]

Yamaguchi signalled the BOJ may ponder further steps aimed at
boosting Japan’s potential growth, besides a recent new loan
scheme put in place as a long-term approach to beat deflation.

“Measures to support growth areas in Japan are not
necessarily limited to our latest step,” he said. Further steps
could include the BOJ accepting a wider type of securitised
product as collateral in its market operations, he said.

In June, the BOJ announced details of the new loan scheme
aimed at encouraging commercial banks to lend more to industries
with growth potential, although analysts say the scheme will do
little to boost the economy. [ID:nTOE65E036]

Policy deadlock created by the ruling Democratic Party’s loss
in a July 11 upper house election may also prompt the government
to lean more on the BOJ should the economic recovery face any
risks and threaten to add to deflation. [ID:nTOE66C005]

Small opposition parties, whose support the ruling party
needs to pass bills smoothly through parliament, have called for
the BOJ to do more to beat deflation such as adopting a more
rigid inflation target. [ID:nTOE66D05R]

Yamaguchi is regarded as being mainly in charge of
communicating the BOJ’s view to the government and ruling party
lawmakers.

Stock Analysis

(Additional reporting by Rie Ishiguro; Editing by Charlotte
Cooper)

WRAPUP 3-BOJ deputy gov says watching FX; yen level not key