MNI INSIGHT: BOJ Concern Over Strong Yen; Y100 Critical Level

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan are increasingly nervous that global trade

disputes could trigger a stronger yen, pressuring the stock market, sentiment

and the export sector, undermining the key foundations of Japan's economic

recovery, although officials see the yen's most critical level against the

dollar around Y100, MNI understands.

     The pair traded around Y109.50 in early Tokyo trade on Thursday.

     A rising currency would see the BOJ facing increasing pressure to extend

its easy policy alongside government stimulus measures, with a key composite

index of economic indicators already showing Japan's economy "worsening" for the

first time in more than six years.

     But the BOJ's recent modification of its forward guidance on rates, saying

it will maintain current low rates at least through "around spring 2020",

prompted by downside risks from lower global growth and the looming sales tax

rise at home, indicates that for now the bank will watch developments without

further easing.

     BOJ Governor Haruhiko Kuroda has cited lowering short- and long-term

interest rates, increasing the scale of asset purchases and accelerating the

pace of injecting monetary base as possible additional tools, if needed.

     Lowering the short-term interest rate from the current -0.1% will be an

effective tool in curbing a stronger yen, but the BOJ is averse to doing so due

to the negative side-effects for financial institutions -- although the bank

could take measures to mitigate some.

     Japan's coincident composite index, which highlights current business

conditions, fell 0.9 points in March to 99.6. The resulting three-month average

automatically triggered an assessment downgrade from "signalling a possible

turning point" in the economy.

     --ELECTION, TAX HIKE

     Growing concern over an economic downturn is a setback for Prime Minister

Shinzo Abe ahead of the upper house elections around July and the planned

consumption tax hike, with the possibility fresh fiscal stimulus measures could

be seen, pressuring the BOJ into considering further action, despite a paucity

of effective fresh policy initiatives.

     The government will release its latest monthly economic report after the

publication of the January-March gross domestic product on Monday, with

attention focused on whether they maintain that the economy is "recovering"

despite weak spots.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

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

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