BOJ's Hayami warns of impact from strong yen


The yen has been on a run of strength since February, and Hayami says fluctuations could hurt the economy

By staff and wire reports

TOKYO, Japan -- Bank of Japan Governor Masaru Hayami said Friday that the yen's level against the dollar is a threat to the country's economic fabric.

"If fluctuations are too sudden, it could lead to instability in financial markets and currency rates," he said before parliament. "That could have a negative effect on the economy."

On a related front, the finance ministry revealed that foreign reserves hit a new high, mostly as a result of currency intervention.

The yen is a little weaker against the dollar on Friday, at 120.33 in late morning Tokyo trade. The currency was not seriously affected by three shooting deaths at Los Angeles Airport (full story).

Takenaka: 'The economy has bottomed'

Economics Minister Heizo Takenaka also said the yen's strength posed a problem for Japan's recovery.

"We need to consider the fallout from a drop in U.S. stock prices, mainly in the foreign-exchange market, as a risk factor," he said in a press conference.

He stated that Japan's economy is coming into a cyclical recovery.

"Recent economic indicators have underscored the government's assessment that the economy has bottomed," he said.

The BOJ's Hayami was much more circumspect about Japan's rebound.

Hayami: No clear signs of rebound

"There are no clear movements toward an economic rebound," he said in his parliamentary address. He makes two each year.


Hayami is not sure the economy is showing signs of a rebound, despite the strong tankan survey

Hayami did refer directly to the tankan report that showed its largest quarterly jump when released on Monday (full story).

That showed an improvement in corporate sentiment, he noted, and signs of an increase in exports and in production.

Japan's economy will likely stop deteriorating if overseas economies improve, he stated. That would lead to improved earnings for Japanese companies and a rise in demand in Japan, he said.

Japan is battling deflation and appears to be coming out of one of its worst recessions since World War II.

Hayami said consumer prices will keep falling moderately. But wholesale prices seem to have stabilized.

Reserves set a record

Japan set yet another record for its foreign reserves on Friday, for the third month in a row.

The Ministry of Finance said the country's foreign reserves rose to $446.2 billion at the end of June. That was an increase of $26.5 billion.

"The rise was caused by the fact that we intervened in the currency market," one finance ministry official told reporters.

The main driver of the increase in reserves was a jump in the amount of securities Japan owns, as a result of the central bank intervening in the currency markets.

The finance ministry also stated that the euro's strengthening against the dollar led to higher reserves, as did an increase in the value of the U.S. bonds it owns.

Bond reserves up 7.7 percent

Japan has been buying U.S. Treasury bonds and selling yen, to weaken the yen. The country owned $363.4 billion in foreign bonds at the end of June, up 7.7 percent from the prior month.

Japan has stepped into the currency markets repeatedly since May. For simplicity's sake, market players said it had "sold yen for dollars" during its intervention. But the figures show it has been buying dollar-denominated bonds.

Japan's foreign-currency deposits dropped 0.76 percent to $65.5 billion.

The stock market is rebounding on Friday, with the Topix up 0.82 percent to 1041.80 by midday. It lost ground for the first time in five days on Thursday (market open).