MNI INSIGHT: BOJ Calmly Watching Tokyo Stock Slump, Tame Yen

--BOJ Unlikely To Raise 10-Year Yield Target For Now Even If US Rate Surges 

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials are taking the slump in the Tokyo

stock market following Friday's plunge in New York stocks calmly, as the yen

didn't firm and domestic long-term interest rate were stable, MNI understands.

     The officials analyzed that the drop in the Nikkei stock index was mainly a

correction of sharp gains made in the past few months when the U.S. Treasury

10-year yield has also risen.

     The Nikkei 225 stock index closed at 22,682.08, down 592.45, or 2.55% on

Monday after falling more than 600 points earlier in the day.

     The 10-year Japanese government bond ended at 0.080%, unchanged from

Friday's close, after rising to 0.085% in early Monday morning trading.

     A troublesome factor for BOJ officials would be a drastic shift by

investors to a risk-off mode, which would likely push the Nikkei stock index

lower and cause yen buying.

     Weaker stocks and a stronger yen would undermine Japan's foundation for a

sustained moderate economic recovery, which in turn would hamper the BOJ from

achieving its 2% inflation target.

     --SOLID ECONOMIC FUNDAMENTALS

     Despite the declines in stock prices in Japan and the U.S., BOJ officials

judge economic fundamentals in both countries are solid. They don't think the

Nikkei stock index will continue falling.

     However, the officials remain vigilant against a continuous drop in the

stock markets, as such a move would hurt business and household sentiment, which

would limit investment and consumption.

     On Friday, the U.S. Treasury 10-year yield rose to a four-year high of

2.852% due to growing concern over higher inflation caused by

stronger-than-expected wage hikes.

     The BOJ's fixed-rate bond buying operation on Friday was "effective in

curbing higher JGB yields" as it carried a strong message that the central bank

had no plans to change its yield curve control target and that it would not

tolerate a rise in the 10-year JGB yield to 0.11%, a person who is familiar with

BOJ thinking said.

     The person added that the BOJ stands ready to prevent a sharp rise in JGB

yields, based on the guidelines on financial operations set by the board.

     On Friday, the BOJ announced to buy 10-year JGBs at a fixed rate of 0.110%

to prevent the 10-year yield from rising above 0.095%. It was the first such

operation since July 7, 2017, when it offered to buy 10-year bonds also at

0.110%.

     --US 10-YEAR YIELD AT 3% FOCUSED

     BOJ officials don't think the U.S. Treasury 10-year bond yield will rise

toward 3% any time soon on the premise that the U.S. inflation rate will not

accelerate sharply.

     But if inflation rises to 2% in the U.S., it would be natural for the U.S.

10-year bond yield to rise to 3%, another person who is also familiar with BOJ

thinking said.

     But even if the U.S. 10-year rate hits 3%, the BOJ is unlikely to raise its

10-year JGB yield control target from around zero percent while it is far from

achieving its 2% price target.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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