BOJ's Miyao: may get less support from overseas demand (Reuters)

HAKODATE, Japan (Reuters) – Bank of Japan board member Ryuzo Miyao said on Wednesday the country's economy may get less support than initially expected from overseas demand as the recovery in the U.S. and European economies loses steam.

"Japan's economy will continue a moderate recovery based on output and exports after supply constraints are resolved," Miyao said in a speech to business leaders in Hakodate on the northernmost main island of Hokkaido.

"But there are some concerns over the recovery scenario," he added, also citing persistent yen rises, higher energy costs and prolonged deflation expectations as factors that could hurt growth.

A former academic, Miyao has voted with the majority since joining the board last year and is regarded as among those on the board who are more pessimistic about the economy.

Below are key quotes from Miyao's speech:

JAPAN ECONOMY

"Japan's economy is picking up steadily as supply constraints stemming from the (March 11 earthquake) disaster have mostly been resolved. Production and exports, in particular, are on a growth trend ...

"Japan's economy will continue a moderate recovery based on output and exports after supply constraints are resolved. But there are some concerns over the recovery scenario: these are slowing overseas economies, the yen's sustained strength, increased electricity costs and worries about prolonged deflation."

OVERSEAS DEMAND

"The first concern regarding the Japanese economy's recovery scenario is the likelihood of overseas demand falling more than expected as the recovery in the U.S. and European economies slows, as a result hurting Japan's recovery.

POLICY

"The BOJ took additional easing at the August 4 meeting ... Although the economy has recovered steadily mainly in output, the BOJ took into account negative factors for the outlook including uncertainty about the global economy and the effect of the change in the base-year for the consumer price index."

EUROPE

"European financial and capital markets remain unstable.

"Since the Greek crisis broke out in May 2010, more and more countries have become targets of market attacks, while the authorities have expanded assistance each time. As the contagion spreads to Italy and Spain, risks surrounding Europe's debt problems are heightening ...

"What is worrying for the future are the spillover effect from the debt problems on Europe's banking sector and real economy. This concern seems to have partly materialized in the form of rises in CDS and widening spreads of corporate bonds. We thus need to closely watch developments."

U.S., EMERGING NATIONS

"The U.S. economy is recovering but the pace of recovery has slowed substantially.

"Emerging economies in Asia have maintained a high growth rate driven by China, and I expect their medium- to long-term growth expectations to remain high. But underlying economic indicators are showing some slowdowns, due in part to monetary tightening to counter price hikes ...

"The effects of the earthquake have largely ended since July but external demand could struggle to pick up on the slowing pace of economic recovery in Europe and the United States."

UNORTHODOX POLICY

"When policy rates are reduced close to zero percent further monetary easing becomes difficult. At the same time a central bank can pledge to keep zero rates in the foreseeable future or expand the size of its assets or change their composition to boost the effects of monetary easing.

"The BOJ's 'comprehensive easing' taken from October last year includes all such elements and is thus an unorthodox monetary policy package. The BOJ has pledged to continue the zero rate policy until price stability is in sight, and is buying various assets ...

"A series of U.S. monetary policy steps since the Lehman crisis are similar.

"While unorthodox policy steps have the mechanism of affecting the economy through various channels, excessive easing is feared to have side effects. First of all, if a central bank intervenes in markets excessively and tamps down risk premiums excessively, it hampers markets' risk-based pricing functions ...

"We need to be fully aware of the fact that unorthodox monetary policy could have unique side effects.

"We need to examine the timing and steps that maximize the effects and minimize the drawbacks and be cautious and decisive in our policy response."

(Reporting by Leika Kihara, Rie Ishiguro and Tetsushi Kajimoto; Editing by Michael Watson)

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Strong yen threatens to force Japanese firms to shift production overseas - Mainichi Daily News

Nissan Motor Co.'s Oppama factory in Yokosuka, Kanagawa Prefecture, is seen on July 2. (Mainichi)

Japanese companies including Toyota Motor Corp. could have no option but to shift production overseas if the yen, which recently hit a post-war record high against the U.S. dollar, remains strong for a long time.

"The strong yen will affect a wide range of businesses. I'm worried that Japan's entire industrial sector could experience a downturn," a top executive at a major electronics company told the Mainichi on Aug. 19. An official of a heavy-equipment manufacturing firm said, "Our international competitiveness will steadily decline."

According to a survey of 119 major Japanese companies conducted by the Mainichi from mid-July to early August, the average exchange rate the companies assumed against the dollar for the current business year (ending at the end of March 2012) was the 82 yen level. Currently, the yen is 6 yen higher than that against the dollar.

As for the auto industry, for every one-yen increase against the dollar Toyota's operating profits are projected to drop by 30 billion yen and Nissan Motor Co.'s by 20 billion yen. Toyota fell into the red in the April-June quarter, and calculates that the strong yen cut profits then by 50 billion yen. Toyota is trying to keep its production lines in Japan, but a senior company official said, "We have no option but to have more parts produced abroad."

Mitsubishi Electric Corp. set its assumed exchange rate at 85 yen to the dollar for the business year ending March 2012. If the rate against the dollar is 1 yen stronger than that, profits will drop by 4 billion yen.

"We have to take conventional measures such as cost-cutting and increasing imports of raw materials, but if the yen continues to be strong for a long time, there are limits to what one company can do to deal with it," said a Mitsubishi Electric official.

Takashi Miyoshi, Executive Vice President of Hitachi Ltd., said, "We have to do more business overseas. Otherwise, we will lose cost competitiveness."

The strong yen has merits: people can travel abroad from Japan and companies in Japan can import raw materials from abroad at lower prices. But most economists believe that the adverse effects of the strong yen on the economy caused by poor business performances will outstrip the merits of the strong yen.

The government and the Bank of Japan intervened in the foreign exchange market to sell the yen on Aug. 4, but the effects of such efforts were limited and business managers have become more frustrated. Prime Minister Naoto Kan has said his government would decide on whether to join the Trans-Pacific Partnership (TPP) free trade pact, but that decision has yet to be made. While the government has failed to implement measures to help boost corporate competitiveness, the yen has strengthened.

"Under these circumstances, production bases could be moved overseas," said a top official of a steel company.

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