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. Last Updated: 07/27/2016

Japan Sees Upturn, Reaffirms Policies

TOKYO -- Japan signaled Wednesday it will maintain support for its fragile economy, as demanded by the Group of Seven leading industrial nations that meet in Tokyo this weekend.

After the Bank of Japan issued a monthly report saying the economy is improving but still weak, both the government and the central bank indicated they will not ease up on efforts to ensure recovery for the world's second biggest economy.

BOJ Governor Masaru Hayami, however, indicated he was chafing at the bank's "abnormal" policy of driving short-term interest rates virtually to zero.

And the ruling party said it would eventually have to clean up the debt mess left by a raft of spending packages.

But Wednesday's statements reassured financial markets that Tokyo's efforts to curb the high-flying yen could be enough to win support from G-7 finance ministers. Traders said this briefly pushed the dollar up against the yen in Tokyo trading.

Two days after deciding to maintain its policy of keeping short-term rates virtually at zero, the central bank left unchanged its assessment that the fragile economy is edging in the right direction.

The BOJ reiterated Wednesday that the economy "has recently turned toward improvement" but that there were no signs of a durable recovery in private demand and that downward pressure on prices persisted.

The BOJ has long said it will maintain its nearly year-old zero interest rate policy until deflation fears abate.

Hayami said he would seek the G-7's understanding of the present policy at Saturday's meeting, although he added: "The zero interest rate policy is unquestionably abnormal and it is certain that the by-products are gradually increasing."

IBJ Securities chief investment strategist Hajime Takata said the BOJ "deliberately sought to avoid speculation ahead of the G-7 meeting that there might be a change in monetary policy."

Similarly, Prime Minister Keizo Obuchi said that although there were signs of economic improvement, "To get the economy on a full recovery track, we cannot loosen our grip and need to conduct appropriate economic management."

Although the political opposition and some rivals in his own party are pushing for fiscal austerity, Obuchi is keen to avoid the political mistakes of his predecessor, Ryutaro Hashimoto, who raised the consumption tax in 1997 and dipped a tentatively recovering economy back into recession.

As a result of government stimulus measures totaling more than 100 trillion yen ($952 billion) and recession-pinched tax revenues, Japan's debt has ballooned to 608 trillion yen, the worst in the industrialized world.

Finance Minister Kiichi Miyazawa said Wednesday the G-7 ought to publicly express concern over the strong yen.

Expectations that Tokyo would get the G-7's backing pushed the dollar to 105.80 yen, up about a quarter yen from its New York close, but the greenback eased later on Hayami's indications that he wants to raise interest rates when the chance arises.

A former Japanese senior finance official, Tomomitsu Oba, said the G-7 would likely reiterate their concern over the yen and that U.S. Treasury Secretary Lawrence Summers would not exert strong pressure onTokyo.

Japan's Kyodo news agency, without citing sources, said Wednesday the G-7 had basically agreed to reiterate or even amplify its concern about the strong yen.

At their last meeting in September, after the yen had climbed nearly 20 yen against the dollar on signs of a fledgling Japanese recovery, the G-7 said they shared Japan's concern over the impact of the high yen on the Japanese and world economies.