MNI INSIGHT: BOJ Could Act If Fed Move Pushes Yen Higher

     TOKYO (MNI) - Current economic and financial conditions does not warrant

swift policy action by the Bank of Japan, although any swift yen rise towards

Y100 against the U.S. dollar following any further easing by the Federal Reserve

could trigger action to curb currency strength, MNI understands.

     The BOJ's next policy decision is due on September 19 -- giving

policymakers the luxury of announcing the day after the Fed's next meeting ends.

     A 25bps cut by the Fed in September - largely expected by many analysts and

economists and fully-priced into futures prices -- is not seen by the BOJ as a

strong enough move to send the yen send sharply higher, although there could be

an initial spike. However, a 50bps cut would be a greater surprise, suggesting a

greater degree of policymaker unease over the state of the U.S. economy, and

could undermine the dollar and send the yen higher.

     On Thursday, the yen was trading at Y106.50 in late Tokyo trade, having

touched Y104.40 on August 26 - a 7-month low, with dollar weakness, regional

risk and wider geopolitical risk all driving a wider safe-haven demand for the

currency.

     Bank officials will get several hours to watch financial market reactions

to any Fed policy change, but would be unlikely to act unless a sharp move

towards Y100 was considered sustainable enough to slow momentum towards its 2%

price target.

     --STORE AMMUNITION

     The BOJ certainly hopes it can refrain from September policy easing in

order to pare yen gains, as there is a belief it needs to keep its powder dry in

case there is a greater slowdown in the economy in Q4 as domestic demand slows

down after the October 1 sales tax hike.

     Bank officials judge that the growing gloom in the manufacturing sector has

not yet flowed through to non-manufacturers as both the underlying trend of

capital investment and consumer spending remain solid.

     But there is obvious concern for capex and spending after the tax hike and

the BOJ may have already decided it must ramp up its easing in tandem with a

government fiscal package.

     The BOJ must continue eyeing 10-year JGB yields into the meeting, as they

are still sitting outside the unofficial -0.2% to +0.2% trading range.

     Governor Haruhiko Kuroda has previously said the bond yield trading range

shouldn't be taken too literally or rigidly, but the recent flattening yield

curve will call into question the BOJ's control of yields, increasing pressure

on the board to outline its assessment through a policy statement.

--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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