FUKUOKA, Japan, Dec 8 - Japan is stuck with deflation for another year even though its economy is likely to keep recovering, Bank of Japan Governor Toshihiko Fukui said on Monday, reiterating the central bank's commitment to monetary easing. "Looking ahead, the economy will maintain a moderate recovery through the rest of this fiscal year and next," Fukui said in a speech to business leaders in Fukuoka, southern Japan. "But with demand still well below supply, we still see prices falling moderately in both this fiscal year and next." He also said a recent rise in the key nationwide consumer price index (CPI), the first in five and a half years, was likely to be temporary and that the BOJ would not reverse its quantitative easing policy any time soon. BOJ officials, including Policy Board member Hidehiko Haru last week, have repeatedly said the rise is temporary, apparently to prevent financial markets from speculating about an early end to its easing policy. Fukui attributed the rise in October CPI a rise in cigarette taxes, a bad rice crop that boosted prices and a change in government policy that lifted medical costs. The BOJ has promised to maintain its policy, in which it floods the market with liquidity and keeps interest rates pinned near zero, until the year-on-year change in CPI stabilises above zero. "Even if the conditions for were met for a policy shift, we could maintain our quantitative easing stance depending on conditions in the economy or prices," he said, emphasising the central bank would make its decision cautiously.
NO MORE ASHIKAGA FOR NOW
Fukui also said the central bank would keep a supportive watch over regional financial institutions, which are taking longer than major banks to improve their health. Financial markets have been speculating about the health of regional banks, particularly after the government decided to nationalise regional lender Ashikaga Bank on November 29. "One cannot deny that regional financial institutions are lagging behind major banks in appropriately assessing their bad loans," he said. "Regional economies have a higher weight of smaller and non-manufacturing firms that are struggling to recover. Prices are continuing to fall and the business environment is still harsh." But there were no financial institutions resembling Ashikaga, and mid-year results showed many were actually making progress in dissolving bad loans. He also said there should be no worries about liquidity in the overall financial market through the year-end, often a concern. Fukui also said a new framework for injecting public funds into banks should be prepared to bolster confidence in the financial system. The current framework only allows for an injection of capital after an emergency has been declared, and Fukui has often said the government and central bank should be prepared to allow more pre-emptive support. Fukui also cited trends in the financial markets as a potential risk to the economy, noting the yen's rise and a fall in Japanese share prices on Monday. A higher yen is seen as a disadvantage to Japanese exporters and a fall in share prices as damaging to heavily invested financial institutions as well as consumer sentiment.
But Fukui steered clear of commenting on the yen's rise, saying only that markets were speculating where the economy was headed. "In the forex, stock and bond markets people are trying to figure out what is going to happen to the global economy from next year," he said. He later told reporters that the BOJ was not too worried about the U.S. economy despite its weaker-than-expected jobs data. "There is no doubt that the U.S. economy is recovering more strongly that had generally been expected," he said. "I have no major concern about the U.S. economic outlook."//