Any world recovery will be mild: Bank of Japan
Tokyo, May 25, 2009
Any recovery in the world economy will be mild as it will take a considerable time to get rid of excesses that built up during the boom years, the governor of the Bank of Japan (BOJ) said on Monday.
Speaking just a few days after the central bank upgraded its assessment of Japan's economy for the first time in nearly three years, Masaaki Shirakawa said the risk and uncertainty the economy faces is still large despite some bright signs.
He said the BOJ needs to keep monitoring conditions in corporate finance, suggesting it is in no hurry to scrap its unconventional measures to help companies raise funds.
"Given that high economic growth continued for many years prior to the current crisis, the possibility that adjustments of excesses will take a considerable time cannot be ruled out," Shirakawa said in a speech to business leaders.
While acknowledging that adjustments in some of the "excesses" such as in U.S. housing markets had made some headway, Shirakawa said working off the excesses and fixing the financial system at the same time could be difficult in light of Japan's experience.
"Even in the middle of adjusting excesses, there will be cyclical upturns and downturns. In fact, the Japanese economy recovered a few times in the 1990s ... But in order for the economy to start a full-fledged recovery, completion of adjustments in excesses and restructuring of the financial system are prerequisites," he said.
The bank last week said the Japanese economy is levelling out, saying a rebound in global demand could mean last quarter's record 4.0 per cent contraction was the worst of the recession.
In the past few months some signs have emerged that the global economy is stabilising, with steep declines in Japanese exports levelling out and industrial output rising 1.6 percent, the first gain in six months.
But Shirakawa said the central bank has not dropped its guard against possible downside risks.
Hirokata Kusaba, a senior economist at Mizuho Research Institute, said: "Shirakawa remains cautious on the outlook. His view has not changed since last month that the economy may be bottoming cyclically but not getting back on a sustainable growth path. There's a lot of uncertainty over the path of the economy.
"His cautious remarks suggest that the BOJ will likely keep its current easing policy for a long time while showing no sign of seeking an exit strategy," Kusaba said.
Shirakawa said the central bank will keep an eye on funding conditions for companies, saying banks could tighten their lending attitude if Japanese share prices fall again, which would cause considerable losses at banks, big holders of shares.
Shirakawa did not elaborate on the policy outlook, only repeating that the BOJ will do its utmost to ensure a recovery.
The bank kept its key interest rate on hold at 0.1 per cent last Friday, having cut it twice since the collapse of US investment bank Lehman Brothers in September triggered a financial firestorm that pushed the global economy into meltdown.
With rates stuck near zero, the BOJ has also scrambled to adopt unconventional measures such as buying commercial paper and corporate bonds as well as increasing its buying of Japanese government bonds. – Reuters