TOKYO—Japanese officials on Friday stepped up their warning over the impact of the widening debt crisis in Europe, saying the government was working with the Bank of Japan in dealing with potential contagion risks.
"The recent spread of credit woes to Italy poses a grave risk to the Japanese economy," minister for economic and fiscal policy Motohisa Furukawa told a news conference. "The government and the Bank of Japan share strong concerns and have agreed to work closely with each other."
He made the comments after a meeting of senior government and BOJ officials Friday to review the progress of measures to cope with the strong yen introduced last month.
The Cabinet Office disclosed Thursday that Japan's financial institutions have the most exposure to Italian sovereign debt among foreign banks after those of France and Germany.
BOJ Gov. Masaaki Shirakawa said separately the euro-zone problem has already affected Japan through the yen's appreciation and falling stock prices, and warned that further damage was possible.
"In addition to financial channels, it could also affect the Japanese economy in various other ways, such as declines in exports to emerging and resource-supplying countries with close trade relationships with European nations," Shirakawa said.
The BOJ chief also said the euro-zone crisis poses "the biggest uncertainty" over the central bank's forecast that the economy will return to a moderate recovery after slowing temporarily.
The government and the BOJ are studying how the crisis could play out and how they should respond, according to a Cabinet Office official. "They are also exchanging information to stay ahead of the curve," the official said in an attempt to reassure financial markets about Japan's ability to handle such a crisis.
The official noted that after the financial crisis that began in the U.S. in 2008, Japan swiftly enacted economic stimulus measures with the support of massive liquidity injections from the BOJ.
In the meeting between senior government and BOJ officials, Deputy BOJ Gov. Hirohide Yamaguchi noted "the crisis of confidence has reached the major economies of Europe and has caused a failure in a bond auction in Germany," according to officials present at the meeting.
"Amid growing risk aversion, investors tend to pile into perceived safe assets such as the Japanese yen," Mr. Yamaguchi was quoted as saying.
The meeting agreed the government should continue to monitor the foreign-exchange market closely and deal with excessive movements appropriately.
The government last month unveiled measures to deal with the soaring yen, which has threatened to derail the post-disaster recovery in the country's export-driven economy. The steps included loans to firms acquiring companies outside Japan and increasing financing for the development of overseas natural gas and other resources.
The government secured funding for these measures this week by enacting a ¥12 trillion ($155.6 billion) third supplementary budget for fiscal 2011.
Mr. Furukawa said the best way to curb further yen surges is to implement the measures as promised. He noted that two Japanese companies—Kyushu Electric Power Co. and Marubeni Corp.—have already received funding from the Japan Bank for International Cooperation to acquire rights to extract natural gas in Papua New Guinea and Australia.
