BOJ policymaker warns emerging markets may see more outflows

Thu Aug 29, 2013 2:16am EDT
 
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By Leika Kihara

MORIOKA, Japan (Reuters) - The global economy could be hurt if the withdrawal of funds from emerging markets picks up ahead of an expected reduction in the U.S. Federal Reserve's monetary stimulus, a Bank of Japan board member said on Thursday.

Yoshihisa Morimoto also signaled that Japan's government needed to proceed with a planned two-stage hike in the sales tax as part of efforts to fix its tattered finances, or face a severe market backlash.

He shrugged off the need to loosen monetary policy again to ease the pain from the tax hikes.

The former utility executive stuck to the BOJ's assessment that Japan's economy was headed for a moderate recovery, but noted challenges such as geo-political risks in the Middle East and market volatility caused by expectations the Fed could start tapering its bond-buying program as soon as next month.

"Market participants are withdrawing funds from emerging and resource-rich nations on expectations (of Fed's tapering) and may continue to do so," Morimoto said in a speech to business leaders in Morioka, northeastern Japan.

"The global economic recovery remains fragile, so there's huge uncertainty on how a sharp outflow of funds could affect financial markets and global growth," he said, in the starkest warning to date by a BOJ official on the potential risk for a bigger capital withdrawal from emerging economies.

The Indian rupee and Turkish lira have both hit record lows against the dollar, the Indonesian rupiah has fallen to four-year lows, and other currencies have fallen sharply as investor sentiment has soured on emerging markets.

Exacerbating the move has been a rush to safe-haven currencies such as the yen as investors worry about the risk of United States launching air strikes on Syria.   Continued...

 
A pedestrian walks past the Bank of Japan headquarters in Tokyo August 8, 2013. REUTERS/Yuya Shino