The decline in the yen following Japan's credit rating downgrade is helping adjust the currency towards its fundamentals, Asian Development Bank President Haruhiko Kuroda said.
The yen hit two-month lows against the euro and two-week troughs versus the dollar on Thursday after Standard & Poor's cut Japan's rating for the first time since 2002, saying Tokyo had no plan to deal with its mounting debt.
Between 2007 and 2010, the yen has risen more than 50 percent against the dollar <JPY=>. It hit a 15-year high near 80 per dollar in October, despite Japan's yen-selling intervention the month before.
"After the downgrade, bond prices did not move very much. But the yen did weaken. The yen was overvalued, having risen too much since 2008 against all currencies in the world," Kuroda told Reuters in an interview late on Thursday.
"So the yen adjusted lower — it's better reflecting fundamentals," added Kuroda, who is former vice finance minister for international affairs at Japan's Finance Ministry.
Standard & Poor's cut Japan's long-term sovereign debt rating by a notch on Thursday to AA-minus, its fourth highest rating. It said an ageing population, persistent deflation and the government's loss of its upper house majority compounded the fiscal challenge.
Politicians and ratings agencies have warned for years that Japan must cut its public debt, which is double the size of its $5 trillion economy — by far the worst among rich nations.
INFLATION DILEMMA
Food inflation is at the top of the agenda for many policymakers, including Kuroda, with memories still fresh of the 2008 food crisis when soaring prices sparked riots in several countries, high inflation and in several cases deep trade deficits.
Earlier this month, the UN's Food and Agriculture Organisation said global food prices reached their highest levels since its records began in 1990 and that grains prices could climb further as adverse weather patterns give cause for concern.
Kuroda said food prices were yet to pose serious risks for Asia as rice prices remained under control, but robust growth in emerging economies underpinned real demand for food.
"Inflation outside of China is more serious — Pakistan, India, or Indonesia. But inflation is the biggest task for China," Kuroda said.
"If China let the yuan appreciate more, that will help control imported inflation. There's more room for that. It's a plus for China's economy."
Many Asian currencies with inflationary problems face a policy dilemma: higher interest rates will attract capital inflows, exacerbate asset bubbles. However, unless authorities act, inflation could get out of control.
"It's a typical policy dilemma. Instead of raising interest rates, bank reserve requirements is one way to tighten liquidity," Kuroda said.
He added Japan experienced a similar issue in the 1950-60s when real growth rate was 10 percent and inflation rate was 5 percent, while the exchange rate was fixed at 360 yen to the dollar. However, back then, the country ran a current account deficit.
