By Stanley White
TOKYO (Reuters) - Bank of Japan Deputy Governor Kikuo Iwata on Tuesday played down any risk that expected interest rate increases by the U.S. Federal Reserve or the Bank of England could pose to financial markets, and dismissed suggestions that the BOJ should raise rates to prevent the yen from falling too fast.
Iwata, speaking at the upper house financial affairs committee, acknowledged there was a chance currencies could react to such rate hikes but noted that foreign exchange markets may have fully priced in expected interest rate increases.
An interest rate hike in the United States or Britain would be an important step in returning monetary policy to normal after the U.S. subprime mortgage crisis, but some investors worry the normalization process could disrupt financial markets.
"I don't see these moves as a risk," Iwata said.
"It could be fully priced in. In that case, there wouldn't be much reaction. Central banks conduct monetary policy for price stability, not for currencies."
Economists and investors are eyeing Fed meetings scheduled for September and December as the most likely timing of the first rate hike in nearly a decade.
The BOE is also moving closer to its first interest rate increase since 2007.
In theory, the widening interest rate differential should cause the yen to fall versus the dollar and sterling, but Iwata said it was difficult to predict how the foreign exchange market would react, because several factors determine currency levels.
When asked by an opposition lawmaker if the BOJ needed to prevent a rapid decline in the yen and an ensuing rise in import prices, Iwata reiterated the BOJ's position that quantitative easing aims for price stability and not to influence currencies.
Internally, the BOJ is conducting simulations about how to end quantitative easing, including its purchase of exchange-traded funds, but it is too early to talk about specific strategies in public, he said.
The BOJ is expected to keep policy steady at a meeting ending Friday, but lackluster exports, output and consumer spending pose a serious challenge to the central bank's optimistic forecasts.
