Bank of Japan's Fukui sees greater downside risk to economy from subprime issue

Bank of Japan's Fukui sees greater downside risk to economy from subprime issue

	Published : Wed, 31 Oct 2007 09:08 By : Agencies Print this Story

TOKYO (Thomson Financial) - Bank of Japan (BoJ) governor Toshihiko Fukui said prolonged volatility on the global financial markets and credit tightness sparked by the US subprime problem pose greater downside risk for the Japanese economy.

At the same time, Fukui reiterated his strong resolve to adjust interest rates in Japan, citing the adverse impact of keeping interest rates too low for far too long even when they no longer reflect the economic fundamentals.

'From a short-term point of view, downside risks related to the overseas economies and global financial markets seem to have increased somewhat and look set to be sustained,' Fukui said at a news conference following the BoJ's policy board meeting.

'But from a longer point of view, if low interest rates that do not reflect economic fundamentals were left for too long, this may cause wild swings in financial and economic activity and result in a mis-allocation of resources,' he said.

BoJ board member Atsushi Mizuho, who proposed hiking interest rates at today's board meeting, 'appears to see stronger risk' in leaving low rates for too long, Fukui said.

The recent volatility in financial markets, triggered by the subprime mortgage problem in the US, provides clear evidence of the moral hazard of prolonging an environment of artificially low interest rates, Fukui said.

To avoid similar risks in the future, he said the Japanese central bank will 'adjust the level of interest rates gradually in accordance with improvements in the economic situation and in (consumer) prices.'

Monetary policy will be managed flexibly and not according to a preset schedule, he said.

Fukui also warned of continuing downside risk in the US and Europe.

'If the housing correction intensifies, or if the negative effects of the disruption in financial markets unexpectedly become widespread, this may lead to further deceleration in the growth of the US economy,' Fukui said.

As far as Japan is concerned, he said its relatively solid economic fundamentals should help the country absorb lingering credit risk.

'The subprime loan problem has had only a limited impact on the Japanese economy. Economic data that has been released since the last policy board meeting confirm the steady expansion of the Japanese economy,' Fukui said.

'While there is greater downside risk to overseas economies and financial markets, the possibility is high that the Japanese economy will achieve a long-lasting expansion amid stable prices,' he added.

Nonetheless, as uncertainty about the global economy remains and downside risks faced by the US economy are still intact, 'We find it necessary to closely watch the global economy and financial markets,' he said.

Earlier in the day, the BoJ's nine-member policy board voted eight-to-one to keep the overnight call rate target unchanged at 0.5 percent.

The Japanese central bank has kept its key rate unchanged for 10th straight meeting.

'By assessing the feasibility of our standard economic scenario as well as the upside potential and downside risks, we will make the appropriate and flexible policy decision,' Fukui said.

'From a longer point of view, however, the upside potential seems fairly large.'

(1 US dollar = 114.72 yen)

yasuhiko.seki@thomson.com

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