A top Bank of Japan official sounded an upbeat note on Japan's economy on Thursday but said currency stability was most important for the recovery and intervention in the currency market was helping bring it about. Policy Board member Toshikatsu Fukuma, in a speech to business leaders in the southern city of Nagasaki, said a sustainable economic recovery was in sight but domestic prices remained under downward pressure. "Domestic and overseas demand are improving and a sustainable recovery is coming into view," Fukuma said. But he added that currency movements were a risk for Japan, threatening the health of exporters who have been the main force behind the recovery so far, thanks to strong demand for Japanese goods from China and other world markets. Japan's government, acting through the central bank, has sold a record amount of yen since the start of 2003 by intervening in the foreign exchange market. It was suspected of doing so again on Thursday. Fukuma told a news conference later on Thursday that Japan's intervention policy was necessary to bring stability to markets. "It is aimed at building up stability, and therefore is very understandable," he said. "Stability is more important than particular (exchange rate) levels. The yen was at five-week highs around 106 yen to the dollar on Thursday from troughs beyond 112 only a few weeks ago.
EXPORTERS COPING?
But government figures on Thursday showed Japan's trade surplus soared in February from a year earlier to its highest since December 1998, helped by strong exports of electronics goods to Asia and indicating that Japan's exporters are coping with the strong yen. The surplus soared 51.7 percent from a year earlier to 1.4069 trillion yen ($13.22 billion), with exports rising 10.3 percent, Finance Ministry data showed. Fukuma said domestic demand in Japan appeared to be improving as company profits rise, helping steer the recovery away from reliance on exports. But prices in Japan would continue to fall, meaning the BOJ must continue the ultra-loose monetary policy by which it makes available more cash than is needed by the financial system in the hope that it will spark economic activity and lift prices. "The BOJ has made its commitment to keep quantitative easing until prices stabilise above zero," Fukuma said. "But for the BOJ, maintaining the loose policy is the most important topic as long as prices keep falling, even as the economy recovers." "That commitment is our 'exit policy'," he added, referring to a debate over how the BOJ would change its policy framework should economic conditions mean the loose policy is no longer suitable. He hinted, however, that the BOJ may even ease policy further despite the recovery, if deflation continued to be a problem. He said it was too early to say when deflation would be beaten, adding that it was better to say it would be beaten "as soon as possible rather than giving a specific time". Fukuma added that the BOJ's surprise decision to ease policy further in January, even though the recovery was improving, was necessary because it reaffirmed the BOJ's commitment to its quantitative easing policy.///www.s.com