MNI INSIGHT: BOJ Doesn't See Economy Derailed; Watches Mkts

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials don't expect greater Middle East

tensions to derail the baseline scenario for the domestic economy, but MNI

understands the central bank remains on guard against downside risks impacting

economic activity and prices.

     MNI understands that BOJ officials see a surge in the yen against the

dollar towards the Y100 level, and a jump in crude oil prices to over US$70 as

the most likely disruptions for Japan's economy.

     The BOJ does not see any immediate need for policy action as the heightened

geopolitical risks have not translated into any panic on financial markets. The

yen strengthened while the Nikkei stock index tumbled today.

     Unless the yen shows a sign of breaking through the Y100 level or the

Nikkei stock index continues falling sharply by more than 1,000 points, the BOJ

is unlikely to take policy action.

     The geopolitical outlook as a result of the situation in the Middle East

situation remains highly uncertain, however, and Bank officials are paying great

attention to sentiment on financial markets and any changes in economy activity.

     BOJ officials are of the view that higher volatility in financial markets

would worsen sentiment and impede spending by firms and households, even though

the VIX (volatility index) has not yet responded to any great extent.

     The dollar traded at around Y108.30 after falling to Y107.65 for the lowest

level since October 2019.

     As of 1241 JST (0341 GMT), the Nikkei 225 stock index traded at around

Y23,244.32, down 331.40 points, or 1.41%, from Tuesday's close, when the index

closed at 23,575.72, up 370.86, or 1.60%, after falling 451.76, or 1.91%, on

Monday.

     A surge in the yen would quickly worsen sentiment and dampen stock prices,

which in turn would reverse a virtuous cycle from profits to spending.

     Also, a surge in crude oil prices would increase upward pressure on

consumer prices, which would help in achieving the 2% price target.

     However, BOJ officials are more worried about the negative impact of higher

crude oil prices as higher energy prices would squeeze corporate profits and

lower spending by consumers who are already suffering from the drop in real

income caused by the tax hike.

     Apart from overseas developments, the focus for BOJ officials is how

exports, industrial production and consumer spending will move toward a moderate

recovery path in the first quarter after briefly falling for the fourth quarter

of 2019.

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

--MNI Sydney Bureau; +61 405322399; email: lachlan.colquhoun.ext@marketnews.com

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