NEW YORK – The Bank of Japan has been communicating with officials around the world over turmoil in financial markets, Deputy Gov. Hiroshi Nakaso said, as stocks tumble and the yen surges.
“Whether we have tools — I think we have tools, but this is something we have to be closely in touch with our counterparts, overseas counterparts,” Nakaso said in response to questions following a speech in New York on Friday. “In fact, we are exchanging views and information in various aspects, just as we have done in the past.”
The turmoil in markets this year is spurring talk of a potential coordinated response by international officials as Group of 20 finance ministers and central bankers prepare to meet on Feb. 26 and 27 in Shanghai. The European Union said in a draft planning document obtained by Bloomberg News that officials must “act urgently to secure a strong and durable global economic recovery.”
“Investors are becoming excessively risk-averse globally, maybe against the backdrop of global uncertainties over the outlook for the Chinese economy, exacerbated by the further slide in oil prices,” Nakaso said. “We will be watching with utmost care how the developments in the global financial markets are going to affect Japan’s economy and inflation.”
Investors are increasingly questioning the capacity of central banks to turn the tide of market sentiment through monetary policy. The BOJ surprised markets on Jan. 29 by joining some its counterparts in Europe with a policy of negative rates. The yen weakened for one day before buyers rushed to purchase the currency as a haven from the volatility in world markets.
Nakaso on Friday said the yen has been appreciating “rather rapidly.” Japan’s currency this month has advanced almost 4 percent against the dollar, the biggest gain among 16 major currencies tracked by this month.
Speaking about the BOJ’s policy in his speech, Nakaso said the central bank has room to expand asset purchases if needed. Afterward, he said he doesn’t have an answer to the question of how much more negative the BOJ can take interest rates, though they “technically” can fall further.
Asked if Japanese banks’ profits will be hurt because of negative yields on government debt they hold, Nakaso said the BOJ is ready to buy bonds at a higher price. “If a bank can sell the JGB [Japanese government bond] to the BOJ with a deeper negative interest rate than 10 basis points, they can still earn some earnings,” he said. “So it doesn’t really squeeze the profitability, not necessarily.”
Nakaso spoke after global equities this past week slumped into a bear market while the yen rallied, undercutting the competitiveness of Japanese exports and reducing the value of profits brought home from overseas operations. A weaker outlook for earnings also undermines calls for higher wages in Japan, while a stronger currency makes imports cheaper, hurting the central bank’s campaign to spur inflation.
Japanese stocks plummeted in Tokyo, with the Topix index posting its biggest weekly loss since 2008. The yen headed for its biggest two-week gain versus the dollar since 1998 during the Asian financial crisis, intensifying speculation Japanese authorities will intervene to weaken it. U.S. stocks halted a five-day slide on Friday as oil rebounded.
Nakaso said Friday that “from what we saw in the past few years, it is very important to have a stable exchange rate” to help stimulate domestic investment.
JPMorgan Chase & Co.’s chief Japan economist, Masaaki Kanno, forecasts another round of monetary easing by the BOJ at its March 14-15 meeting, and said intervention in the currency market is also possible.
Kazuhiko Ogata, Credit Agricole’s chief Japan economist, said the market rout has increased pressure on the BOJ, adding that the central bank is a long way from its inflation target of 2 percent.
BOJ Gov. Haruhiko Kuroda reiterated to the Diet on Friday that the BOJ would take the necessary steps to reach its price goal. He also said that the negative rate policy has had an initial impact on the yield curve and that its impact would spread to prices and real economy.
Even after about three years of Abenomics and record stimulus from the central bank, consumer price inflation is still barely above zero and Japan’s economy still can’t escape a roller- coaster cycle of expansion and contraction. Economists forecast that data due on Monday will show that gross domestic product contracted in the three months through December, making for a fifth quarter of shrinking GDP since the beginning of 2013.