The state of the nation’s economy will likely remain severe in the first half of 2002 as a result of the Prime Minister’s ongoing structural reforms, according to the chief of the central bank.

In a recent interview with Kyodo News, Bank of Japan Gov. Masaru Hayami warned against yielding to pain and putting off reforms necessary for growth led by private demand.

“If you yield to pains, the situation will go back to what it was,” he said. “What the central bank needs to do now is continue the current relaxed monetary policy persistently to underpin the economy.”

Asked about how the BOJ would deal with a possible surge in concerns about the financial system, Hayami said it is prepared to inject public funds into capital-strapped banks and offer collateral-free loans to troubled institutions, among other measures.

On the issue of whether to scrap the full guarantee on bank deposits at the end of March as scheduled, Hayami said it is up to the government.

But he added that another extension of the scheduled abolition could undermine confidence both within and outside Japan.

The full deposit guarantee was slated to be abolished at the end of March 2001, but it was postponed for one year as the ruling coalition parties feared it could trigger a financial crisis by prompting depositors to move their money out of weak banks.

The abolition would have paved the way for the state-backed Deposit Insurance Corp. to guarantee up to 10 million yen per account.

Hayami reiterated his opposition to extending the scope of financial instruments subject to BOJ market operations to include foreign bonds and stocks.

“Why is it necessary to purchase such unstable products? Such action would lead to ‘Japan-selling,’ ” he said, referring to possible acceleration of sales of Japanese securities and the yen.

Hayami indicated he is not happy with the current exchange rate of roughly 131 yen to the U.S. dollar.

“The yen should not have fallen to such a level,” Hayami said, citing Japan’s healthy balance of payments. “It is OK for the yen to fall temporarily, but it is no good to guide it.”

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