BOJ's Nakamura Says Economy May Deteriorate Further

By Keiko Ujikane

Nov. 13 (Bloomberg) -- Japan's economy is at risk of deteriorating further as the global financial turmoil slows growth worldwide, central bank board member Seiji Nakamura said.

``Japan could be on the verge of long-term economic adjustments and the downside risks to the economy are increasing further,'' Nakamura said today in a speech in Matsuyama, western Japan.

The Bank of Japan cut interest rates last month for the first time in seven years to stem damage from the worst global financial crisis since the Great Depression. The central bank won't rule out further monetary easing ``if the economy deteriorates sharply,'' Nakamura told reporters after the speech.

``Nakamura's comments highlighted the possibility that the economic downturn in the global economy, including Japan, may deepen,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. ``The BOJ may cut rates to 0.1 percent by the end of December and go back to zero percent by the end of March.''

The Bank of Japan lowered its benchmark interest rate to 0.3 percent from 0.5 percent on Oct. 31. Governor Masaaki Shirakawa cast the deciding vote after Nakamura and three others on the eight-member board dissented. Three wanted to cut the rate to 0.25 percent and one wanted to leave it unchanged.

`No Major Gap'

Nakamura, 66, said there was ``no major gap'' between board members' views, while declining to comment on the details of the discussions and how he voted at the meeting.

Future policy decisions will be made ``based on the state of the economy, prices and financial markets,'' Nakamura said, adding that conditions don't warrant immediate action.

Even as interest rates decline, Nakamura said borrowing conditions in Japan are becoming tighter. Companies are becoming more dependent on bank loans as they struggle to raise funds by selling commercial paper and other instruments, he said. At the same time, banks are becoming reluctant to lend as the slowdown deepens.

``Given concern over the future of the economy and business performance, banks' lending attitude is becoming cautious and there's a change in monetary conditions that were accommodative,'' he said.

Stressed Banks

Japanese banks' capital has eroded since the financial crisis increased bad debts and losses on stock holdings. Mizuho Financial Group Inc., the country's second-largest bank by revenue, plans to raise about 300 billion yen ($3.2 billion) by selling preferred securities, a person familiar with the matter said today.

The Nikkei 225 Stock Average tumbled 5.3 percent today, and has plunged 33 percent since the market rout intensified in the wake of Lehman Brothers Holdings Inc.'s Sept. 15 bankruptcy.

Nakamura, a former shipping company executive, also said he was concerned that the recent sharp gains in the yen are depleting exporters' earnings.

``The yen has strengthened, especially against the euro, and that's leading to deterioration in profits of exporters,'' he said.

Japan's currency has surged 37 percent versus the euro in the past three months and climbed to a 13-year high of 90.93 against the dollar on Oct. 24. The yen traded at 95.86 per dollar and 119.85 versus the euro at 3:44 p.m. in Tokyo.

Slowdown Spreading

Exporters are also facing weakening demand as the global slowdown spreads to emerging economies such as China and Russia. That trend may get worse, Nakamura said.

``Growth expectations on the emerging nations, which supported the global economy, are declining, risking further slowing of the U.S. and European economies,'' he said. ``It's getting difficult to see when the overseas economy will regain momentum.''

The world economy probably won't begin to recover until around the middle of the fiscal year starting April, he said.

Evidence that Japan is faltering has grown in the past month. Industrial production tumbled for a third quarter in September, retail sales dropped for the first time in 14 months and household spending fell for a seventh month.

The world's second-largest economy expanded at a 0.1 percent annual rate last quarter, according to the median estimate of 26 economists, after it shrank 3 percent in the previous three months. The Cabinet Office will publish the gross domestic product data on Nov. 17.

Central banks around the world are lowering rates to limit the damage from the crisis and prop up their economies. The European Central Bank and the Bank of England cut borrowing costs last week. The U.S. Federal Reserve lowered its benchmark rate to a record-equaling 1 percent last month.

To contact the reporter on this story: Keiko Ujikane in Matsuyama at kujikane@bloomberg.net