WAKAYAMA – Bank of Japan Policy Board member Miyako Suda said Thursday the economic outlook has grown cloudier because of Europe’s deepening sovereign-debt crisis.
“Uncertainty has risen and I’m paying more attention to downside risks,” Suda said in a speech in the city of Wakayama. Globally, “stock and currency markets are increasingly unstable, which could lead to a deterioration in corporate and household sentiment, hurting capital and consumer spending not only in Europe but Japan as well.”
Suda is the first board member to voice caution about the outlook since the BOJ raised its economic assessment last month. Data in the past week showed capital spending tumbling, deflation deepening and unemployment rising and Europe’s fiscal woes have contributed to a 6.6 percent drop in the Nikkei stock average this year.
Suda also said the BOJ will continue to maintain an “extremely accommodative financial environment” because beating deflation is a “critical challenge.”
She said overheating in China and other emerging countries and a decline of growth expectations among companies in Japan also pose risks to the nation’s recovery, which she said will probably be moderate.
BOJ Gov. Masaaki Shirakawa last month said the bank plans to provide one-year loans at the same rate as the 0.1 percent key overnight lending rate to encourage lending in areas that would spur growth.
The central bank has faced pressure to fight deflation from the government, whose ability to spur the economy is constrained by record public debt.
Suda said expanding fiscal spending would hurt the economy in the longer run and discourage consumption.
“Should trust in fiscal policy deteriorate, debt-servicing costs will increase because of higher yields,” Suda said. That will “also hurt the balance sheets of financial institutions, increasing the downward pressure on the economy,” she said.
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