MNI INSIGHT: BOJ Eye Volatile Markets From Skeleton US Staffs

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan still sees weakness in the U.S. economy as

a major obstacle in coming months, although the Federal Reserve's 100 bps rate

cut and USD700 billion asset purchase program announced Sunday along with fiscal

packages announced by legislators will offer some respite, MNI understands.

     With large parts of the U.S. economy being shuttered, the BOJ sees the

likelihood of a severe contraction Stateside as the main -- and growing --

threat to the Japanese economy.

     As many in the U.S. financial markets move towards remote working or split

staffing, the BOJ is concerned that than acceleration of the trend will see

market players minimize their normal trading, pulling back on risk.

     This would increase the risk of volatile swings in financial markets, which

could impact severely on sentiment.   

     The BOJ has been comforted that the yen hasn't appreciated in recent days,

as a strong yen is still the most troublesome factor for Japan's economy and a

sustained move towards JPY100 would force the bank to cut the short-term policy

rate from -0.10%, a move the bank would rather avoid due to known side effects.

     --CURRENCY REPATRIATION

     One concern for the BOJ is the sense of crisis in the U.S. pushing U.S.

financial institutions to repatriate their overseas assets back into dollars.

     That has helped limit the yen's recent appreciation, offering some relief

to BOJ officials, but there is a worry that Japanese banks face a difficulty

raising dollar funds as U.S. banks and investors look to take a tighter grip on

the global reserve currency.

     It isn't an immediate problem and the BOJ's latest offers to inject dollars

into the system saw no bidders, underlining no current dollar shortage.

     This week's announcement that the BOJ and the Federal Reserve, along with

other major foreign central banks, cut pricing on their swap lines, will make it

easier to provide dollars to financial institutions facing stress in credit

markets.

     The phenomenon of currency repatriation is familiar to the BOJ, who saw the

yen appreciate rapidly as Japanese financial firms repatriated yen in the wake

of the 2011 Great East Japan Earthquake and tsunami.

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

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

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