TOKYO (MNI) – Japanese Prime Minister Naoto Kan on Friday vowed to
take a “firm” action to counter the drag of a rapid rise in the yen when
necessary, without elaborating, newspaper and television reports said.

Kan also told reporters that he plans to meet Bank of Japan
Governor Masaaki Shirakawa sometime after the central bank chief returns
to Tokyo next Monday from the Jackson Hole economic policy symposium
hosted by the Federal Reserve Bank of Kansas City.

“I expect (the BOJ to conduct) flexible monetary policy,” Kan was
quoted as saying by local media.

On Monday, Kan and Shirakawa discussed the currency market and the
latest economic climate over the phone. They only confirmed that the
government and the central bank should work closely together to guide
the economy toward a self-sustaining recovery.

Shirakawa has said upside and downside risks to Japan’s sustained
recovery are nearly balanced in the medium term.

He also has argued that Japan’s moderately recovering economy,
which is stronger than late last year when risk aversion caused by the
Dubai financial shock pushed up the yen, should be able to withstand the
negative impact of the yen’s rise on exporter profits.

Meanwhile, Kan said on Friday that he is well aware that the strong
yen “could have negative effects on the stability of the economic and
financial conditions,” adding that the government “will take a firm
action when necessary.”

Kan made these remarks after visiting small businesses in Tokyo to
see how they are coping with the recent appreciation of the yen against
major currencies.

He confirmed that his administration will thrash out basic plans
for its economic stimulus package on Tuesday in order to end deflation
and defend the export-led recovery from the threat of a rapid rise in
the yen against the dollar.

The yen rose to a 15-year high against the dollar this week and hit
a nine-year peak versus the euro, prompting speculation the BOJ, on
instruction from the finance ministry, may yet initiate direct market
intervention for the first time since March 2004.

Finance Minister Yoshihiko Noda sought to stem the yen’s further
rise by telling reporters on Wednesday that his ministry would take
“appropriate” action in the forex market.

Policy options for the central bank are limited as it has already
conducted a series of measures to maintain the extremely accommodative
financial conditions.

At its next policy-setting meeting on Sept. 6-7, the BOJ board
could expand its fund-injecting operations at the super-low 0.1% for
funding needs longer than overnight.

But the board is unlikely to consider cutting the target for the
overnight lending rate from the current 0.1%, which is the lowest
possible rate without hurting money market functions.

A sell-off in the Tokyo stock market could hurt both business and
consumer sentiment, clouding a self-sustained economic recovery, while a
drastic, one-sided surge in the yen’s value will undermine exporter
profits and thus hit the main driver behind the current modest recovery.

The government’s new economic package will include measures to help
new graduates find jobs through trial hire and internship programs,
support people living under the poverty line and back small businesses’
investment in technological development, the Asahi Shimbun reported
earlier this week.

In order to support consumer spending, the government also plans to
extend the reward program for building ecologically friendly houses and
enhancing the energy efficiency of existing homes. The program for such
renovations will end next March and that for the construction of
single-family houses will finish June next year.

tokyo@marketnews.com
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