Hiroshi Watanabe, formerly Japan’s currency policy chief, also said Tokyo must pledge to pursue fiscal consolidation at the Group of Seven finance chiefs’ meeting next week in the French city of Marseille, at a time when the debt crisis in the West has shaken financial markets.
“The dollar will stay in between 75-80 yen for a while and then go beyond 80 yen as early as November or by January,” Watanabe, who served as vice minister for international affairs for three years to July 2007, told Reuters in an interview.
Watanabe now heads the state-backed Japan Bank for International Cooperation (JBIC). He is also a member of the Asian regional advisory group at the International Monetary Fund, maintaining close ties with policymakers within and outside Japan.
Watanabe said the yen’s strength did not reflect economic fundamentals and that it should be rectified when the focus shifts from jitters about debt problems in the West to the state of the real economy.
“Markets are being overly pessimistic,” he said, referring to the economic situation in Europe and the United States.
“It would be too much to talk about a second dip although I’m also concerned that growth may remain tepid,” he said.
Japan is grappling with the currency’s strength, which threatens the economy’s recovery from the deadly earthquake and tsunami in March. The yen was hovering below 77 yen versus the dollar on Friday after it hit a record high of 75.94 yen in mid-August, about two weeks after Tokyo intervened on Aug. 4.
As Japan’s economy is seen recovering while Europe and the United States face slowdown, Tokyo is having a hard time convincing G7 counterparts of the need for intervention after rare joint action taken in March.
But Watanabe said Japan may intervene in the market at an appropriate time again to curb volatility, rather than targeting specific levels.
European politicians on Thursday rejected an IMF call for banks to raise up to 200 billion euros ($290 billion) in new capital, adding to fears that policymakers may be underestimating the severity of the debt crisis.
Watanabe said in order to reassure markets, the G7 must share a common view on facts including the state of undercapitalization of banks, and have G7 members commit to fiscal discipline in Marseille.
“Japan is no exception. It is reaching a point where it must vow to carry out fiscal reform as its fiscal situation can no longer be overlooked,” Watanabe said, warning that markets may turn attention to Japan’s debt situation from next year on.
At the same time, he urged the G7 to declare that they are ready to provide fiscal stimulus to shore up their economies if necessary although further monetary easing would not be effective.
“I don’t think QE3 would work ... as the United States is in a liquidity trap as Japan has experienced,” Watanabe said referring to the possibility of the Fed announcing more large-scale government bond purchases to prop up faltering growth.
“There’s room for fiscal stimulus among the G7 except for Japan and Italy. I don’t think reckless fiscal stimulus would be good, but at least the G7 should say they are ready to act if necessary.”
