By Leika Kihara
TOKYO, March 6 (Reuters) – Japan will coordinate with overseas authorities and stands ready to take action against market volatility stemming from the Middle East conflict, Finance Minister Satsuki Katayama said on Friday, issuing a fresh warning against sharp yen falls.
Bank of Japan Deputy Governor Ryozo Himino also said the central bank will be vigilant to yen moves as they could affect underlying inflation and public perceptions of future price moves.
“Yen declines push up consumer inflation by prodding firms to pass on rising import costs,” Himino said.
“We need to be mindful that exchange-rate fluctuation has a bigger impact on price moves than in the past. Through this channel, they could affect inflation expectations and underlying inflation,” Himino told parliament.
While the BOJ does not directly target exchange rates, it will scrutinise currency moves given the significant impact they have on economic and price developments, Himino said.
The remarks highlight the BOJ’s focus on the inflationary impact from a weak yen that may justify further increases in its policy rate, which, at 0.75%, is still low by global standards.
Katayama told the same parliament session the government was ready to take steps to combat the economic blow from the Middle East conflict, including compiling an extra budget.
She said Japan was coordinating with its Group of Seven counterparts on the group’s response to the war, which has disrupted oil transports and jolted financial markets.
“Markets are very volatile in the wake of developments in Iran. We are ready to take all necessary steps, coordinating closely and nimbly with overseas authorities,” Katayama said.
Katayama’s remarks are the latest jawboning by policymakers to arrest sharp yen falls that push up import costs and broader inflation.
A widening conflict in the Middle East has added to Japan’s dilemma by boosting oil prices and jolting global financial markets, clouding the outlook for its economy that is heavily reliant on fuel imports.
CONFLICT COMPLICATES RATE-HIKE TIMING
Japanese shares marked their steepest weekly drop in almost a year on Friday, as the Middle East war disrupted traffic through the Strait of Hormuz, choking oil supply and pushing investors out of risk and into cash. The yen stood around 157.60 per dollar, not far from the 160 line seen as Japanese authorities’ line in the sand for yen-buying intervention.
Himino repeated the BOJ’s view that underlying inflation, which excludes the impact of one-off factors, will gradually accelerate toward its 2% target as a tight job market and a moderate economic recovery push up wages and prices.
He made no mention of the timing of future rate hikes.
With the Middle East conflict showing few signs of easing, the BOJ is likely to hold off on raising rates until June or July, its former top economist Seisaku Kameda said on Friday.
“The BOJ is already behind the curve in addressing mounting inflationary pressure. The risk of being too late could heighten further with rising oil prices and the weak yen,” Kameda said.
“But with markets so jittery and the likelihood of an early end to the conflict fading, the BOJ probably has little choice but to stand pat,” he told Reuters.
The BOJ raised interest rates to a 30-year high of 0.75% in December, taking another landmark step in ending decades of huge monetary support in a sign of its conviction that Japan is progressing toward durably hitting its 2% inflation target.
BOJ executives have signalled readiness to continue raising still-low interest rates, though offering few hints on how soon the next rate hike could come.
(Reporting by Leika Kihara; Editing by Shri Navaratnam)
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