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BOJ officials see lower yen offering some support in the inflation battle although higher import costs to weigh on corporate profits.
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A weaker yen will be a net boost for the Japanese economy, but Bank of Japan officials still see a risk from a lower currency on import costs and through to some companies' profitability, MNI understands.
The lower yen is a teaser for bank officials: on the plus side it will help push inflation higher and increase exporters' profits, but against that it will cause an overall worsening of the terms of trade.
The yen fell to JPY110.83 Thursday, the lowest level since April, as the dollar rallied on increased market expectations of the Federal Reserve starting to taper its bond buying in the not too distant future, before recovering to JPY110.25 late Friday. The currency is still firmly in the BOJ's comfort zone of JPY100 to JPY120 against the U.S. dollar and officials don't expect a test of those boundaries any time soon.
Historically, the BOJ is more concerned by a stronger yen and has previously moved to stem and rises, including the 2016 decision to take overnight rates negative -- and Governor Haruhiko Kuroda has said rates could be cut further again if the yen strengthens.
But the BOJ officials feel they have less ammunition to fight a weaker yen, as the bank can't move to hike rates yet and an economic recovery that will boost the currency is still some way off.
Higher import prices from raw materials and crude oil prices, exacerbated by a weaker yen, will squeeze corporate profits as businesses won't be able to pass higher costs on to consumers. That could undermine the bank's view that a virtuous cycle from corporate profits to capital investment is still in place.
That, the BOJ officials worry, will inhibit companies ability to raise wages, weigh on consumer spending and thus lead to a pause of a virtuous cycle from income to spending.