China tur­moil needn't rat­tle BoJ, yen rise not a worry: Abe ad­viser

The Pak Banker - - COMPANIES/BOSS -

Ja­pan's cen­tral bank needn't rush into ac­tion in re­sponse to China's re­cent mar­ket tur­moil, and the way it made the yen jump is not a prob­lem for the Ja­panese econ­omy, a key eco­nomic ad­viser to Prime Min­is­ter Shinzo Abe said on Wed­nes­day. Koichi Ha­mada, an emer­i­tus pro­fes­sor of eco­nom­ics at Yale Univer­sity, told Reuters that China's sur­prise cur­rency de­val­u­a­tion and mon­e­tary eas­ing will make ex­porters in Ja­pan and neigh­bor­ing coun­tries less com­pet­i­tive.

The short-term im­pact of China's moves is "a kind of neg­a­tive spillover. The lower yuan will make the hur­dles higher for other na­tions, in­clud­ing Ja­pan," Ha­mada said in an in­ter­view. "But other coun­tries can re­lax their own mon­e­tary pol­icy if the shocks of Chi­nese mon­e­tary ac­tions are too strong."

The yen JPY= has jumped in re­cent days as in­vestors have fled to as­sets per­ceived to be safer, with global mar­kets sink­ing on wor­ries over China. Bei­jing, who de­val­ued the yuan CNY=SAEC on Aug. 11, cut in­ter­est rate sand the re­serve ra­tio late Tues­day.

The dol­lar fell to a seven-month low of 116.15 yen on Mon­day, be­fore the rate cuts, squeez­ing Ja­pan's ex­porters. It rose to around 119.50 yen late on Wed­nes­day.

But Ha­mada said lev­els around 116-118 yen "won't pose a big risk to Abe­nomics", the premier's re­fla­tion and growth poli­cies that have pro­duced a sharp weak­en­ing of the yen since Abe came to of­fice in late 2012.

While pol­i­cy­mak­ers needn't re­act to short-term mar­ket moves, he said, a pro­longed fur­ther strength­en­ing of the yen could force the Bank of Ja­pan to ex­pand its mas­sive mon­e­tary stim­u­lus.

"If the yen be­comes stronger than the cur­rent level for another one month or two months, then the BOJ may take mon­e­tary ac­tions," Ha­mada said. "We still don't know the depth of the im­pact from China." Ja­pan's econ­omy con­tracted at an an­nu­al­ized pace of 1.6 per­cent in the sec­ond quar­ter on weak ex­ports and con­sumer spend­ing.

On top of that, the mar­ket tur­bu­lence is a con­cern for Ja­panese pol­i­cy­mak­ers, who worry it could erode al­ready-weak ex­ports, which would have neg­a­tive knock-on ef­fects on the world's third-big­gest econ­omy.

Ha­mada said the steep drop in oil prices is "a bless­ing" for Ja­pan that should be wel­comed, and is not a prob­lem for the BOJ, which is strug­gling to lift Ja­pan out of decades of de­fla­tion. The cen­tral bank, he said, should fo­cus on a nar­rower gauge of con­sumer prices that strips out oil.

He also said Ja­pan should raise the sales tax to 10 per­cent in April 2017 from 8 per­cent. The gov­ern­ment hiked the tax in April 2014, which dented con­sumer spend­ing. "The sales tax should be raised as sched­uled. But we should be very care­ful it would not hurt the wel­fare of Ja­pan's lower-in­come peo­ple," Ha­mada said. He said there should be some tax-code changes or struc­tural tax changes to help low-in­come cit­i­zens cope with a higher sales tax.

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