Tokyo: Japan is ready to offer $106 billion to the International Monetary Fund if it needs extra funds to help emerging economies, a Japanese government source said on Thursday, as a central bank board member warned the financial crisis has a long way to run.
Deflation rather than inflation is becoming an increasing concern across the globe, with Japanese wholesale inflation slowing sharply in October and analysts warning of weakening demand for goods as the crisis pushes developed economies towards recession.
Financial markets have remained jittery despite efforts by governments and central banks worldwide to ease the pain from the crisis. Tokyo’s Nikkei stock average sank 5% on Thursday as a wave of grim earnings forecasts from the United States boosted worries about the global economy.
Prime Minister Taro Aso will propose offering IMF the fund when leaders of the Group of 20 industrialised and emerging nations meet for a crisis summit in Washington on Friday, the government source told Reuters.
Under Aso’s draft proposal, Japan will lend part of its currency reserves totaling $980 billion, to the IMF for emerging market loans, the Nikkei business daily reported in its Thursday edition.
Although the amount is still undecided, the maximum is expected to be about 10% of Japan’s foreign exchange reserves, the paper said.
Selling US government bonds held by Japan in order to provide the funds in cash would affect US bond yields. Tokyo may therefore consider lending US government bonds to the IMF, which the institution can then use as collateral to raise funds, the newspaper added.
Bank of Japan policy board member Seiji Nakamura warned of difficult times ahead, saying Japan may be on the brink of a drawn-out adjustment phase as the global financial crisis could slow down the world economy.
“Japanese banks’ lending attitude is turning cautious due to concern over the economy and the earnings outlook, suggesting a change in easy monetary conditions,” Nakamura told business leaders in a speech on Thursday.
Japan’s economy shrank at the fastest pace in seven years in April-June, and some analysts think it may have contracted again in the following quarter, which would meet the most common definition of a recession.
The median forecast in a Reuters poll for July-September gross domestic product, due out on Monday, is for an increase of 0.1%.
Annual wholesale inflation, as measured by the corporate goods price index, slowed to 4.8% in October from 6.8% in September, data showed on Thursday, surprising market players who had forecast a rise of 5.5%.
While the slowdown was mostly due to declines in oil and commodity prices, some analysts said weak domestic demand may add downward pressure on overall prices ahead.
The Bank of Japan, which had opted out of coordinated interest rate cuts earlier, joined the global trend late last month by cutting its key rate to 0.30 from 0.50%.
Tokyo announced last month that it was ready to tap its massive foreign reserves if the IMF were to require additional resources to help countries facing financial meltdown. At the time, officials did not provide any further details.
Finance ministry officials told Reuters over the past few weeks that Japan had not acted on its offer as the IMF still had sufficient funds and had not asked for help.