MNI INSIGHT: BOJ Unruffled On Yen, Eyes Govt Reax If 120 Hit

Bank of Japan officials remain unruffled about the yen’s recent fall as the depreciation is moderate and the background is clear, but the central bank has broader concerns about government reaction, MNI understands.

Bank officials see a level of JPY120, last reached in 2015, as a threshold that could prompt the government to voice concern over the potential negative impact for energy costs and other imported goods on households and smaller firms and call for BOJ action.

The dollar rose to a JPY116 level on Wednesday due to a widening interest rate gap between the U.S. and Japan caused by different directions in monetary policies.

UPPER HOUSE ELECTIONS

A government call on the BOJ for countermeasures would be a troublesome factor for policy as the central bank does not have effective tools to guide the currency. On the other hand, the government is watching the currency and economy closely ahead of Upper House of parliament elections this summer. Households in Japan tend to hold back spending unless wages rise sufficiently to absorb higher retail prices.

But BOJ officials also see that the yen’s fall, if it is slow, will be acceptable as Japan is far from a target of a sustained 2% rise in prices. If prices in Japan were above 2%, officials would see yen weakness as undesirable.

BOJ officials don’t have a strong sense of crisis so far as the currency moves are relatively slow and justified by economic and financial conditions, see MNI INSIGHT: BOJ May Consider 10-Yr Yield If Yen Hits 125 Fast.

COST PRESSURES NOTED

Analysis of yen moves by the BOJ has pointed to higher import prices, for raw material prices denominated in U.S. dollars. The BOJ like other major central banks in industrialised nations is not targeting foreign exchange rates regarding monetary policy.

Last year, BOJ Governor Haruhiko Kuroda assessed that a weaker generally has a net positive impact on economic activity and prices in cautious in remarks on the currency.

BOJ officials tend to judge whether to take policy action based on assessments that a currency move could worsen economic activity and the output gap, which in turn eventually will delay the achievement of the 2% price target.

A weaker yen pushes up the inflation rate, known as “cost push,” but such a rise is not sustainable unless it involves a relationship between wage hikes and the price-setting behaviour of firms.