TOKYO, Oct 1 - Bank of Japan Governor Toshihiko Fukui said on Wednesday that stable foreign exchange rates were essential for Japan's fight against deflation, and that the BOJ was watching both forex markets and interest rates closely. "We are closely watching currency markets and long-term interest rates," Fukui said in a speech delivered on his behalf by Deputy Governor Kazumasa Iwata in the northern city of Sendai. "Stable foreign exchange markets are essential for Japan to beat deflation," he said. The yen has surged to nearly three-years highs against the dollar in recent days after the Group of Seven economic powers called for flexibility in exchange rates.
Markets took this as a message to Japan from its trading partners to stop intervening to hold down the yen. But Japan has since resumed intervention and a chorus of officials and ministers -- worried that a strong yen could hurt exports -- have tried to talk down the currency with threats of strong action. Fukui, who cancelled his trip to Sendai to answer questions before a parliamentary committee, said in the speech that markets had taken a biased view of the G7 statement, which did not prevent countries acting to stop volatility in markets. He said Japan's basic stance that exchange rates should reflect fundamentals and move in a stable way had not changed. "Stable exchange rates are extremely important for Japan's recovery," he said. He added that the recovery continued to improve, as shown in the BOJ's "tankan" survey of business sentiment released earlier on Wednesday. Japanese companies feeling better about business conditions outnumbered those that were gloomy for the first time in almost three years in September, the survey showed.
Large manufacturers were the most optimistic. However, Fukui said the recovery was still held in check by structural problems such as excess debt and workforces. Separately, Fukui told a parliamentary committee he saw no major damage to the health struggling regional banks from rising long-term interest rates. "There are differences among them, but even looking at them individually, there is no strong damage at this point," he said. On the bond market, Fukui said the surge in yields had been arrested and the market had stabilised. Bond yields have surged since mid-June along with a rise in share prices on optimism about the economy.//