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Thursday, Bank of Japan Governor Masaaki Shirakawa reiterated that the central bank is prepared to act swiftly and decisively if concerns arise that financial market stability may be compromised.
In a speech to the Board of Councillors of the business association, Nippon Keidanren, he said given that globalization is irreversible, it is not appropriate to see external demand and domestic demand as opposing concepts. It is both important to reap the fruits of global economic growth and to lay the groundwork for expanding domestic demand, said Shirakawa in Tokyo.
He noted that the yen strengthened rapidly since the outbreak of the global financial crisis and has been trading around its level in the early 2000s. This appreciation eliminated the portion of exports supported by the depreciation of the currency since the second half of the 2000s.
The appreciation of yen against the U.S. dollar threatens export earnings of Japan and makes its imported goods cheaper. Earlier in the current decade, the Japanese government had intervened in the market extensively to counter the yen's appreciation. But, the government ceased to intervene since March 2004.
According to Shirakawa, consistent endeavor between policy makers such as the BoJ and private sector entities in their own fields are required to help the economy to emerge from deflation and return to a sustainable growth path with price stability. He added that the pace of economic improvement will remain moderate up to around the middle of fiscal 2010 as pressure to adjust production capacity and employment is likely to remain.
On November 20, the Hatoyama government had declared that the economy is in deflation, the first official announcement of deflation since mid-2006. In the December Policy Board meeting, the BoJ said it would not tolerate the annual change in consumer prices remaining at zero percent or below.
Today, Shirakawa said the root cause of deflation is weaker aggregate demand. The supply-demand balance of the overall economy should be improved so as to emerge from continuous price falls. Efforts to generate short-term demand and improving medium-to-long term expectations for income growth, reflecting increases in productivity are the two approaches required in relation to this situation, said Shirakawa.
Regarding the future course of action, he said the BoJ will maintain the extremely accommodative financial environment and provide consistent support to Japan's economy to overcome deflation and return to a sustainable growth path.
Japan's government is expected to forecast 1.4% growth for the economy for fiscal 2010, according to a Nikkei business daily report on Thursday. It would mark the first real growth in three years, showing an exit from the downturn. This estimate is expected to be approved at early Friday's cabinet meeting.
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