BOJ's Policy May Have Affected Global Markets, Yamaguchi Says

By Mayumi Otsuma and Lily Nonomiya

Oct. 21 (Bloomberg) -- The Bank of Japan's low interest rates may have contributed to the global financial-market turmoil, said Hirohide Yamaguchi, the government's nominee for deputy governor of the central bank.

``We can't rule out the possibility that our accommodative policy has had some influence on overseas financial markets,'' Yamaguchi, who is currently an executive director at the central bank, said at a parliament hearing today in Tokyo. ``Some people say one side effect of our policy is the yen carry trade,'' in which investors borrow cheaply in Japan and put money into higher-yielding securities abroad, he said.

The central bank kept interest rates near zero percent for five years through July 2006 to spur economic growth and counter deflation. The monetary authority has since raised the benchmark overnight lending rate to 0.5 percent, still the lowest among the industrialized world.

Even so, the low-rate policy ``brought more benefits'' than harm for Japan and was necessary given that the economy and financial system had been ``in a very severe state for a decade,'' Yamaguchi said.

Bank of Japan policy board appointments have been a sticking point for the government, which saw five of its nominees rejected by the opposition-controlled upper house since March. The opposition Democratic Party of Japan will probably support Yamaguchi, said Yoshito Sengoku, a former head of the party's Diet affairs committee.

`Capable and Prominent'

``I got the impression that Mr. Yamaguchi is a capable and prominent central banker and he's outstanding among the central bank's executive directors,'' Sengoku told reporters after today's hearings. Both houses are scheduled to vote on Oct. 24.

Yamaguchi also said the bank decides interest-rate policy based on the economy and prices and wouldn't participate in joint action with counterparts from abroad for the sake of it.

``We don't implement unnecessary policy even if it's requested by some other countries,'' Yamaguchi said.

The Bank of Japan didn't participate in this month's joint rate cut by central banks in North America and Europe, saying the nation's borrowing costs are already ``very low.'' The policy board last week kept the key rate unchanged.

The most important responsibility of central banks is to provide liquidity to keep the financial system stable, Yamaguchi said. The Bank of Japan needs to look at the risk of inflation accelerating as well as the economy stagnating, he added.

``Uncertainty for the economy is very high, and there are considerable risks,'' Yamaguchi said. ``We will try to react to situations without delay.''

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net