BOJ Shirakawa warns of yen rise pain on Japan economy

TOKYO, (Reuters) - Bank of Japan Governor Masaaki Shirakawa warned on Monday that recent yen rises could hurt the country’s economic outlook by undermining exports and corporate sentiment, voicing alarm over mounting risks to the fragile recovery.    

 Shirakawa also said Europe’s sovereign risks and mounting tensions in U.S. debt talks have left open the possibility of a sharp rise in global bond yields, which would severely hurt advanced nations with worsening finances.    

 Stocks fell on Monday while safe haven currencies such as the yen rose, as efforts failed to produce a political deal to avert a U.S. default, although there were no signs of panic selling.

 Japanese authorities have stepped up their warnings about yen rises, which they fear could hurt the export-reliant economy, but that did not keep the dollar from hitting a fresh four-month low around 78.10 yen early on Monday.    

 Shirakawa warned that yen strength may harm Japan’s economy by undermining exports, corporate revenue and business sentiment if they are driven by uncertainty over the global economic outlook.     “The United States, Europe, emerging and commodity-producing economies are all saddled with risks,” Shirakawa said in a speech at a seminar.

“Given these risks in the overseas economy, we need to carefully watch moves in the currency market.”    

Shirakawa’s latest warning on the potential harm of yen rises was more detailed than remarks last week, when he said only that yen rises put short-term downward pressure on the economy. Monday’s comments suggested growing alarm at the BOJ over the yen’s strength.

 “We will continue to carefully examine the outlook for the economy and prices, and take appropriate action when necessary,” he said, signalling the BOJ’s readiness to ease monetary policy further if its forecast of a moderate economic recovery later this year comes under threat.    

 Finance Minister Yoshihiko Noda also said on Monday that recent currency moves were one-sided and that he was closely watching market developments.    

    

 GLOBAL OUTLOOK UNCERTAIN    

 U.S. lawmakers failed to achieve a budget breakthrough and instead worked on rival plans on Sunday in an impasse that heightened the prospects for a catastrophic U.S. debt default.    

 Growing market worries about the possibility of a U.S. debt default, coupled with Europe’s debt problems, have pushed up the yen as investors seek the relative safety of Japan’s currency.    

 That clouds the outlook for Japan’s economy, which is just shaking off supply constraints from the devastating earthquake in March and needs support from exports to exit recession.    

 Shirakawa stuck to the BOJ’s forecast that the Japanese economy will resume a moderate recovery in autumn, but issued stronger warning over potential risks to the outlook.    

 “If global financial markets destabilise as a result of Europe’s sovereign risk, that would hurt the world economy,”

Shirakawa said.    

 “While we expect the global economy to achieve strong growth as a whole, there are various uncertainties over the outlook. We need to be mindful of these risks,” he said.    

 Despite repeated verbal warnings by policymakers against pushing up the yen too much, traders say Tokyo is unlikely to intervene in the market because the moves are being driven by factors beyond Japan’s control.    

 That puts pressure on the BOJ to ease policy further in the hope of pushing down bond yields and stemming yen rises.    

 Central bank officials concede that a yen spike accompanied by sharp falls in share prices would be the most likely next trigger for further easing.    

 Shirakawa said the BOJ would consider what it can do to support the economy in the short term.    

 But he repeated his opposition toward calls for the bank to underwrite government debt or buy bonds to be issued to fund reconstruction costs for the March quake, stressing the need instead to pursue fiscal reform.    

 “Japan’s fiscal balance is worsening but long-term interest rates have moved stably at the lowest level in the world,” Shirakawa said.    

 “But unless there is a specific plan for restoring Japan’s fiscal health, the market’s perception may suddenly change.”    

 The BOJ has kept policy on hold since easing credit just days after the March earthquake by topping up a pool of funds to buy assets ranging from government bonds to private debt.    

 But BOJ Deputy Governor Hirohide Yamaguchi said last week that the central bank would act flexibly and decisively with an eye on how yen rises could affect the economy, signalling readiness to ease further if the recovery comes under threat.    

 The central bank will hold its next rate review on Aug. 4-5.