Japan Downplays Fallout From Market Tumult

Japanese policymakers pledged to maintain massive monetary support and sought to dispel concerns that a global equities rout could hurt a strengthening recovery, stressing the country’s economic fundamentals remained strong.

But they held off on warning markets against pushing up the yen too much, as investors started to buy into the Japanese currency which is considered a safe bet during times of market ructions, Reuters reported.

Tokyo’s circumspection suggested it was wary of stirring tension with Washington over currency and trade issues, leaving it with little room to maneuver as it worries that an unwelcome spike in the yen could dent its exports.

Bank of Japan Governor Haruhiko Kuroda ruled out the possibility of raising interest rates any time soon, telling parliament that it was “inappropriate” to do so with inflation still distant from the bank’s 2% target. “Japanese inflation hasn’t even reached 1%. As such, it’s inappropriate to prematurely shift monetary policy just to create future policy space,” Kuroda said on Tuesday.

Prime Minister Shinzo Abe also voiced hope the BoJ keeps its current ultra-easy policy, saying that he had full trust in Kuroda’s handling of monetary policy.

Japan’s Nikkei dived to near four-month lows on Tuesday after Wall Street’s overnight plunge on concern that major central banks may roll back stimulus quicker than expected as inflation showed signs of making a comeback.

The dollar slid to 108.73 yen, below the 110 yen level where many Japanese manufacturers base their earnings forecasts for the fiscal year ending in March.

The market rout, if it persists, threatens to undermine one of the few key successes of the premier’s “Abenomics” stimulus policies, aimed at reflating the economy out of stagnation.

It could also delay any plan by the BoJ to edge toward an exit from crisis-mode stimulus, analysts say.

 “Even if the economy were to continue expanding, it would have been difficult for the BoJ to raise rates this year,” said Ryutaro Kono, chief Japan economist at BNP Paribas. “With the market behaving like this, it’s become even more unlikely.”

Some government officials fret that the market volatility could discourage firms from raising wages, though for now many of them hope the turbulence proves temporary.

“Japan’s corporate profits are at a record high, wages and the labor market are improving and consumer spending is recovering. Japan’s economy is solid,” Economy Minister Toshimitsu Motegi told a news conference on Tuesday. But there is uncertainty on how Tokyo could respond if the yen rises further.