WASHINGTON (Dow Jones)--The Japanese yen will continue to weaken against other major currencies whether or not the government enacts the reforms needed to halt a decade of economic stagnation, a former Federal Reserve official said Friday.
Laurence Meyer, who ended a six-year term as Fed governor last month, told CNBC in a taped interview that the economic difficulties of the world's second biggest economy have grown so large that a broad package of fiscal reform, bank restructuring and "aggressive" monetary expansion is needed to restart economic growth.
Such a package, however, doesn't appear likely anytime soon, Meyer said. The best that Japan can hope for, as a result, is economic stagnation. "That's unfortunately the case in the near term," he said, "If one wants to look around and identify areas of downside risk in the global economy, I think one would begin with Japan."
"So what do you do? You have to have a comprehensive package," Meyer said. "You have to do a number of things, and they all have to be done in the right direction. You've got to do the things that will help you in the long run today, even though there are downside risks, and do the best job you can to fill in the hole with somewhat more aggressive monetary policy, in particular."
Japan's economy fizzled more than a decade ago but prospects for a recovery remain as dim as ever. The country's central bank has cut interest rates to zero, but consumers have remained fearful: retail sales have fallen for three years and the unemployment rate has climbed to its highest level since the end of World War II. The Japanese currency, moreover, has weakened steadily against the U.S. dollar.
Meyer said Japan's central bank has grown reluctant to give the economy more monetary stimulus in the absence of fiscal reforms by the government. "One of the things we see in the Bank of Japan is a reluctance to move ahead with more aggressive monetary policy, when there isn't a comprehensive package or a willingness to move forward with some of the more difficult choices on structural reform in the banking sector," he said.
Under the circumstances, Meyer said, the Japanese yen is bound to weaken further. In the CNBC interview, taped Thursday, Meyer was asked whether it was true that "in any of one of the scenarios, we end up with a weaker yen - either they do nothing and they sink into an abyss and the yen goes down, they cheapen the yen as a deliberate strategy, or they do the things they think they ought to do and the yen falls as a result."
He replied: "I would agree with that. I think the prospects are for some decline in the yen. The question is how much, what the timing is, and what the source is, and how acceptable it is to the trading partners in the region and to other major countries in the world."