China turmoil needn't rattle BOJ, yen rise not a worry: Abe adviser

[August 26, 2015]  By Kaori Kaneko and Sumio Ito

TOKYO (Reuters) - Japan's central bank needn't rush into action in response to China's recent market turmoil, and the way it made the yen jump is not a problem for the Japanese economy, a key economic adviser to Prime Minister Shinzo Abe said on Wednesday.

Koichi Hamada, an emeritus professor of economics at Yale University, told Reuters that China's surprise currency devaluation and monetary easing will make exporters in Japan and neighboring countries less competitive.

The short-term impact of China's moves is "a kind of negative spillover. The lower yuan will make the hurdles higher for other nations, including Japan," Hamada said in an interview. "But other countries can relax their own monetary policy if the shocks of Chinese monetary actions are too strong."

The yen has jumped in recent days as investors have fled to assets perceived to be safer, with global markets sinking on worries over China. Beijing, who devalued the yuan on Aug. 11, cut interest rate sand the reserve ratio late Tuesday.
 

The dollar fell to a seven-month low of 116.15 yen on Monday, before the rate cuts, squeezing Japan's exporters. It rose to around 119.50 yen late on Wednesday.

But Hamada said levels around 116-118 yen "won't pose a big risk to Abenomics", the premier's reflation and growth policies that have produced a sharp weakening of the yen since Abe came to office in late 2012.

While policymakers needn't react to short-term market moves, he said, a prolonged further strengthening of the yen could force the Bank of Japan to expand its massive monetary stimulus.

"If the yen becomes stronger than the current level for another one month or two months, then the BOJ may take monetary actions," Hamada said. "We still don't know the depth of the impact from China."

Japan's economy contracted at an annualized pace of 1.6 percent in the second quarter on weak exports and consumer spending.

On top of that, the market turbulence is a concern for Japanese policymakers, who worry it could erode already-weak exports, which would have negative knock-on effects on the world's third-biggest economy.

Hamada said the steep drop in oil prices is "a blessing" for Japan that should be welcomed, and is not a problem for the BOJ, which is struggling to lift Japan out of decades of deflation. The central bank, he said, should focus on a narrower gauge of consumer prices that strips out oil.

He also said Japan should raise the sales tax to 10 percent in April 2017 from 8 percent. The government hiked the tax in April 2014, which dented consumer spending.

"The sales tax should be raised as scheduled. But we should be very careful it would not hurt the welfare of Japan's lower-income people," Hamada said.

He said there should be some tax-code changes or structural tax changes to help low-income citizens cope with a higher sales tax.

(Editing by William Mallard and Richard Borsuk)

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