NAGOYA, Japan, Sept 3 - Bank of Japan Governor Toshihiko Fukui, in a bid to calm down a bond market unsettled by recent signs of economic recovery, vowed on Wednesday to keep monetary policy relaxed until deflation is clearly stamped out. Fukui's comments come on the heels of recent sharp rises in Japanese government bond (JGB) yields on speculation that the nation's long-struggling economy may be turning the corner and that this could prompt the central bank to tighten policy. But the BOJ chief promised that the so-called "quantitative easing" policy, under which the central bank floods the money market with liquidity and keeps short-term interest rates at virtually zero, will stay in place even if the economy picks up a little.
"You can rest assured that the ultra-loose policy will stay in place as long as the CPI (consumer price index) is falling or only showing weak rises," Fukui told business leaders in Nagoya, central Japan. "Even if the economy were to improve from here, we will maintain our quantitative easing policy until prices steady at positive levels. The BOJ is taking a big risk in doing so," he added. Fukui has said the criteria for ending the quantitative easing policy implied a risk of possible sudden jump in inflation if there was a delay in monetary tightening. He said the recent surge in bond yields was abrupt, but that the BOJ was not startled.
"The rise in long-term yields is at a rapid pace, but the central bank will deal with this in a calm manner," he said. "We will watch financial markets closely and carefully, which includes watching out for moves that do not reflect real economic conditions." The yield on the benchmark 10-year JGB, which had risen as high as 1.675 percent -- its highest level in more than 2-Ѕ years -- early on Thursday, retreated below 1.50 percent by midday, thanks in part to Fukui's comments. The BOJ introduced the quantitative easing policy in March 2001, when it promised to keep the policy in place until year-on-year CPI changes stabilised above zero. That pledge was aimed at a so-called "time scale" effect, where the longer end of the yield curve also eases on expectation that the central bank's policy will remain relaxed for a long time. Fukui, speaking to an audience which included Toyota Motor Corp <7203.T> President Fujio Cho, also said an easy BOJ policy had the effect of restraining the yen's export-crimping strength. But he added that the central bank could not directly guide currency rates to certain levels.
"Foreign exchange intervention cannot dictate moves in the market, but they can be stabilised," he said.//