MNI INSIGHT: BOJ Monitors Yen Rally, But Focus On Global Econ

Bank of Japan officials are more focused on policy cues from a possible U.S. recession and slower global demand than recent solid yen gains against the dollar in July as firms importing goods do not immediately change spending plans based on short-term forex moves, MNI understands.

Recent data points to a recovery in factory output, but overall capital spending is still constrained by uncertainties around a surge in Covid-19 cases and the prospect of tepid exports based on a U.S. slowdown and lingering supply-chain gaps, (See: MNI INSIGHT: Data Reinforces BOJ's Stance Despite Factory Gain).

The yen has gained over 4% against the dollar since July 14 when it skirted JPY139-140 intraday and settled at JPY138.96. But after the July 21 board decision to hold policy steady, the yen has rallied steadily to levels near JPY 130 intraday and a near-term closing level of JPY 131.61 on Aug. 1, with a slight weakening this week.

But the yen's rally has caught the attention of BOJ officials as, if sustained, it could lead to lower costs for imported goods and commodities, particularly energy, in the face of expectations of higher than expected cost-push inflation ahead, (See: MNI STATE OF PLAY: BOJ's Easy Views Intact Despite Higher CPI). There is a time lag of several months for yen strength or weakness to affect prices and the cost of imports.

The latest BOJ Tankan survey showed that average of predicted dollar/yen rate for overall businesses this fiscal year was JPY118.96, stronger than the levels above JPY135 reached in July, though sentiment has weakened with inflation expectations also higher.