A prolonged US budget standoff would hit global markets very hard, the Bank of Japan warned as it said it was ready to top up its existing massive stimulus if the recovery underway in the world’s third-largest economy was threatened.
But for now, BOJ Governor Haruhiko Kuroda saw no need to ease policy further as Japan was on the path to escape deflation and, if international risks receded as hoped, government fiscal stimulus would further boost growth next year.
The US budget deadlock and fears of an unprecedented US default dragged Tokyo shares to a four-week low and boosted the yen, casting a cloud on an otherwise upbeat outlook for Japan’s export-driven economy.
“If this continues for a long time, this could destabilise financial markets and worsen sentiment,” Kuroda told reporters after a two-day policy review meeting, adding that the BOJ was ready to respond to any sudden shocks.
If this continues for a long time, this could destabilise financial markets and worsen sentiment
He declined to comment on the possibility of a US debt default, but said the consequences of a prolonged standoff on global markets would be “severe.”
“We sincerely hope a solution is reached at an early date,” Kuroda said. Through its massive holding of US government debt, Japan is one America’s biggest creditors.
Other top international policymakers have also warned that a failure to raise the US debt ceiling before mid-month would be a serious blow to the world economy.
As expected, the BOJ kept intact its intense monetary stimulus launched in April, under which it aims to double base money via asset purchases to meet its target of lifting inflation to two per cent in roughly two years.
On Tuesday, Prime Minister Shinzo Abe said he would proceed with a planned increase in the sales tax to eight per cent from five per cent next April, and cushion its impact with a five trillion yen ($51 billion) stimulus package.