Bank of Japan deputy governor Kikuo Iwata (left) speaks as Hiroshi Nakaso looks on during a press conference in Tokyo. The two top policymakers said yesterday the bank stands ready to expand monetary stimulus further if necessary to safeguard its inflation mandate.

Reuters/Tokyo

The Bank of Japan (BoJ) stands ready to expand monetary stimulus further if necessary to safeguard its inflation mandate, two top policymakers said yesterday, warning that the rout in emerging markets was already affecting Japanese assets.
Deputy Governor Kikuo Iwata dismissed the chance of an immediate expansion of monetary stimulus, stressing that solid US growth will underpin global demand and keep the world’s third-largest economy on track for a moderate recovery.
“I am not too worried about the US economy and therefore in terms of Japan’s monetary policy I think we can stick to our existing policy,” he told a news conference after meeting with business leaders in Miyazaki, southern Japan.
But the former academic, echoing concerns expressed by Governor Haruhiko Kuroda that lacklustre growth in emerging Asia is weighing on exports, stressed the BoJ’s readiness to act should external risks undermine its inflation target.
After nearly a year of monetary and fiscal stimulus roused the world’s third-biggest economy from decades of slumber, the concern among some in the BoJ is that trouble elsewhere could undermine the hard-won progress.
“Financial markets, including those in emerging economies, are making jittery movements,” Hiroshi Nakaso, the other BoJ deputy governor, told parliament yesterday.
“If some kind of risk materialises, we will take necessary policy adjustments to ensure achievement of our 2% price target,” said Nakaso, a career central banker with deep expertise on global affairs. Nakaso warned that the sharp selloff in emerging market currencies, triggered in part by the US Federal Reserve’s tapering of its massive stimulus, has already affected Japan by lifting the safe-haven yen and hurting equities.
Still, both deputy governors stuck to the BoJ’s upbeat view that overseas economies will recover over time, despite the recent sell-off reflecting concern that growth in advanced nations may fail to offset the emerging market slowdown.
Iwata also sought to dispel market speculation the BoJ may pre-empt the damage from a sales tax hike in April with additional easing, saying that Japan can withstand the pain from the higher tax as exports and capital spending increase.
“Some people see downside risks (to the economy) as pretty big, but I see them as relatively small,” he said.
Investors are waiting for the next trigger after a currency crisis in Argentina, signs of slowing growth in China and the withdrawal of US monetary stimulus hit emerging markets, prompting abrupt interest rate rises in deficit-laden India, South Africa and Turkey.
The selloff in emerging markets pushed the safe-haven yen to multi-month highs, boding ill for Japan’s economy that needs stronger growth in exports to make up for an expected drop in household spending after the sales tax hike in April.
Markets have scaled back expectations of immediate BoJ easing after Kuroda last month voiced confidence that his price target can be achieved without additional stimulus.
Iwata’s remarks put him among those in the nine-member board relatively confident about Japan’s economic prospects. They run counter to the views of board pessimists such as former International Monetary Fund economist Sayuri Shirai, who worry faster inflation and the higher sales tax may hit consumption harder than expected.
Recent data pointed to an economy that continues to pick up momentum on strong domestic demand, driven by Prime Minister Shinzo Abe’s massive fiscal and monetary stimulus.
Some BoJ officials, however, worry about lacklustre growth in exports. Iwata echoed that view, saying sluggish growth in Asean economies, which have close ties with Japan, was largely behind soft exports.
“But we expect these economies to gradually gain momentum in the long-term as the recoveries in the US, Europe and China start to spread,” he said, adding that exports will gradually increase as global demand recovers.