Currency chief says it’s time to act

Bloomberg

Japan’s top currency official warned against delays in efforts to improve the nation’s finances as Prime Minister Yoshihiko Noda grapples with the world’s biggest public debt burden.

Advanced economies such as Japan “cannot postpone fiscal consolidation efforts forever,” Takehiko Nakao, 56, vice finance minister for international affairs, said in an interview in his office in Tokyo on Tuesday.

Noda faces opposition in the Diet and within his Democratic Party of Japan as he seeks to double the consumption tax by 2015 to boost revenue, highlighting the risk that policy initiatives will stall. The government must quickly overhaul the tax and social security systems to prevent borrowing costs from spiraling in the next decade, Yasuhiro Sato, chairman of the Japanese Bankers Association, said last month.

Nakao took the role once made famous by Eisuke Sakakibara, the official who became known as “Mr. Yen,” last August. He declined to comment on the yen’s level or the currency’s rebound since mid-March against the dollar.

Last year, he oversaw interventions that helped pull the yen back from a post-World War II high of 75.35 against the dollar that was cutting sales and profits for exporters. Easing by the Bank of Japan has also helped to curb gains.

Nakao saw signs of strength in the U.S. economy and said that China has scope for fiscal and monetary expansion if needed, with Premier Wen Jiabao’s government aided by “very large” increases in tax revenue. A Chinese trade report announced Tuesday showing weaker than forecast imports fueled concern that a slowdown there may deepen.

In Japan, government spending on quake reconstruction, the fading of disruptions to supply chains from Thai flooding and the yen weakening a “little bit” have aided the recovery from the Tohoku disasters, Nakao said.

Last year’s “very speedy appreciation” of the currency was “not very helpful,” Nakao said, adding that it was difficult to conclude that the currency’s gains reflected economic fundamentals.

The Upper House last week rejected the administration’s candidate for a vacancy on the BOJ’s Policy Board, underscoring the risk that political gridlock limits policy changes. The Cabinet needed to draft the first stopgap funding bill in 14 years to keep the government running after the Diet failed to adopt Noda’s 2012 budget.

The nation’s borrowings will exceed ¥1 quadrillion for the first time in this fiscal year, the Finance Ministry projects.

Separately, Nakao indicated limits on how the nation’s $1.2 trillion of currency reserves will be used after portions went into supporting rescue efforts for Europe and the Chiang Mai Initiative, a pool of funds used to shield Asian economies from shocks.

“We are not thinking of using our reserves like a sovereign wealth fund,” he said, adding that the public and the Diet would need to reach a consensus on setting up any such operation.