Bank of Japan Governor Masaaki Shirakawa on Monday warned the country's economy will remain in a severe state for now as Europe's sovereign debt crisis and yen rises cloud the outlook, signaling the central bank's readiness to boost monetary stimulus further if risks to the recovery heighten.
But he said Japan cannot escape deflation just by having the central bank print money, stressing that government and corporate efforts to boost productivity and nurture new industries were also necessary.
Shirakawa stuck to the view that Japan's economy will eventually resume a moderate recovery backed by solid demand in emerging nations, but warned that Europe's debt woes were the predominant risk to this outlook.
He also said Japan will continue to seek G7 and G20 understanding over its action to curb sharp yen rises, stressing that Tokyo's latest intervention was aimed at curbing excessive and disorderly currency moves.
When uncertainty over the overseas economic outlook is high, as is the case now, yen rises may hurt Japan's economy by reducing exports and corporate profits as well as by worsening business sentiment. We need to be mindful of this, he told business leaders in Nagoya in the central Japan prefecture of Aichi, home to automobile giant Toyota Motor Corp <7203.T>.
Japan's economy will likely be in a severe state for the time being, especially with respect to exports, he said.
Japan intervened in the currency market and eased monetary policy in October to ease the pain on the export-reliant economy from sharp yen rises and slowing overseas growth.
The BOJ kept monetary settings unchanged this month but warned of the widening fallout from Europe's debt crisis, signaling its readiness to ease policy again if Japan's economic recovery comes under threat.
Shirakawa said European banks are being forced to curb lending as they face difficulty raising funds in the market, warning of heightening tensions in global markets, particularly for dollar funding.
In Europe, shrinking market confidence over its fiscal state is heightening concern over the region's financial system stability, which in turn is affecting the economy, he said.
Shirakawa said the BOJ will continue to do its utmost to support Japan' economy. But he countered the view that it was not easing aggressively enough compared with other central banks, saying Japan's private-sector borrowing costs are the lowest among advanced economies.
To believe that deflation can be solved by printing money alone would be considering the problem in too simplistic terms, Shirakawa said.
What's most important is to strengthen the growth potential for Japan's economy, he said.
(Reporting by Leika Kihara; Editing by Chris Gallagher)