TOKYO (MNI) – Bank of Japan Governor Masaaki Shirakawa said Asian
countries have felt limited spillover from unstable European financial
markets and the sovereign debt crisis there but warned of further
deleveraging by European financial institutions.

“So far, the spillovers from Europe to Asia have been mild.
Deleveraging by European financial institutions looks moderate for the
most part, with Asian financial institutions filling the shoes of
European banks in some cases,” Shirakawa said on Thursday at a dinner
reception hosted by the Japanese Securities Dealers Association.

The BOJ released the speech text on Friday.

Shirakawa said, “Given that European financial institutions have
enjoyed a visible presence in Asian financial businesses — most notably
in corporate syndicated loans, trade finance, and lease finance
involving ships and aircraft — it is sensible, however, to pay careful
attention to deleveraging by European financial institutions.”

He also warned, “Asian economies are not immune to the sovereign
debt problem in Europe. Three potential channels of contagion can be
noted: first, trade links; second, financial market disturbances; and
third, deleveraging by European financial institutions.”

“Naturally, these three channels are not mutually exclusive. For
instance, the longer the disturbance continues in European financial
markets, the harder the hit to the balance sheets of European financial
institutions, which causes European deleveraging in Asia,” Shirakawa
said.

“If this spreads to disrupt trade finance, Asian economies heavily
reliant on exports would surely suffer.”

With the ongoing turmoil in European markets, and sluggish growth
in the U.S., BOJ policymakers are paying close attention to developments
in emerging economies as alternative drivers for the global and Japanese
economies.

At the last two-day policy-setting meeting which ended on Jan. 24,
the BOJ board said, “Japan’s economic activity will remain more or less
flat for the time being.”

“After that, the economy is expected to return to a moderate
recovery path as the pace of recovery in overseas economies picks up,
led by emerging and commodity-exporting economies, and
reconstruction-related demand after the earthquake disaster gradually
materializes,” it also said.

The BOJ is due to hold its next two-day policy-setting meeting next
week, on Monday and Tuesday.

tokyo@marketnews.com
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