BoJ calls for action as Nikkei tumbles to 17-year low

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The Governor of Japan's central bank yesterday intervened in the growing crisis over the country's economy to call on the government to boost demand.

The appeal by Masaru Hayami to stimulate growth came as Japan's Nikkei stock index plunged to a fresh 17-year low.

Mr Hayami said the Bank of Japan's measures to ease monetary policy could not lift the economy on their own and urged progress in economic reform.

"The BOJ will continue to make every effort to prevent a continuous slide in prices and help put the economy on a sustainable growth path," Mr Hayami said in a speech to business leaders.

"But in order to make monetary policy easing effective and ensure sustained economic growth, it is vital that structural reforms make progress."

The impact of his remarks was accentuated by a fall in the Nikkei to below 11,000 for the first time since October 1984.

While declining to comment directly on the Nikkei's fall, Mr Hayami said: "We will continue to carefully monitor the impact of stock prices on the real economy."

There are growing fears that figures next week on gross domestic product in the three months to June will show an economic contraction.

On 14 August, the BOJ decided on a further easing of its quantitative policy by raising its target for current account deposits parked at the central bank to 6 trillion yen (£34bn) from 5 trillion yen.

Mr Hayami argued against recent calls by politicians for the central bank to take more radical measures such as adopting an inflation target or buying more assets to create inflation artificially.

Setting an inflation target was "not appropriate," he told a news conference after the meeting. "Inflation targeting has been adopted by nations that want to contain inflation. I have never heard of a case where it was used in a country facing deflation."

If GDP growth does register its first decline for three quarters, this will pave the way for an extra budget for this fiscal year to next March.

Richard Jerram, chief economist at ING Barings, said: "I'm not really encouraged by the supplementary budget because it seems to me that it's so small that it's not going to make any difference."