MNI INSIGHT: BOJ Debates Extending Forward Guidance

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan policymakers are still debating whether to

extend their forward guidance or to take other action such as boosting purchases

of exchange-traded funds at their July 31 meeting in response to flagging

economic momentum and possible easing moves by the Federal Reserve and the

European Central Bank, MNI understands.

     Officials looking for policy restraint point to no signs of deterioration

in the domestic data, and say overseas economies may pick up in coming months.

     But others are concerned by worsening sentiment surveys, which they fear

may impact capital investment and consumer spending, and fret that a lack of BOJ

action as other global central banks ease will see the yen strengthen,

pressuring Japanese exports.

     They favour extending the forward guidance for policy rates from "around

spring 2020". Other possible moves would be widening the range of the 10-year

interest rate from around -0.20% to +0.20%, or increasing purchases of ETFs from

about Y6 trillion annually.

     Markets already assume the Fed will cut by 25 bps, and such a move should

have limited impact on the yen. However, a bigger cut -- or a very dovish FOMC

statement -- could send the yen higher from current levels around Y108.00.

     Other BOJ officials judge that momentum towards hitting their 2% price

target remains, even if it is not yet sufficiently firm. They still see the

virtuous cycle from profits to spending in place, although they accept downside

risks are greater than in April, despite the continuing strength of capital

investment plans.

     The next few months are key, as they will show whether there is a recovery

in the global economy and how Japan's domestic consumption -- holding up well to

date -- responds to the October sales tax hike.

--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

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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