MNI INSIGHT: BOJ May Announce Stability Moves Before Open

By Hiroshi Inoue

     TOKYO - The Bank of Japan may announce measures to stabilise financial

markets ahead of the Tokyo open Monday, possibly expanding special loans to

support bank lending to companies and injecting fresh liquidity into the system,

MNI understands.

     It is increasingly likely that BOJ Governor Haruhiko Kuroda will issue a

statement to confirm the Bank is prepared not only to fight a slowing economy,

but also to stabilise markets, as he follows the Friday night lead from Federal

Reserve Chairman Jay Powell. It remains unclear whether such a statement would

be unilateral, or part of a more coordinated effort between global central

banks.

     The BOJ could consider greater flexibility in its exchange-traded funds

purchases to try to stabilise the Nikkei 225 before corporate and consumer

sentiment is undermined, although it understands that monetary policy alone will

not be sufficient to buoy the economy until the coronavirus outbreak ends and

China's output returns to normality.

     Any announcement from the BOJ outlining same-day fund injections is

expected around 0900JT (0000GMT), a little earlier than the normal time of

0920JT.

     --YEN CONCERNS

     BOJ officials are concerned the yen may strengthen through JPY105 towards

JPY100 on any Fed action to fight the impact of the virus, particularly a rate

cut at - or before - the mid-March FOMC meeting.

     Expectations of a Fed cut were heightened late Friday when Powell noted it

was monitoring developments and the implications for the outlook and would "use

our tools and act as appropriate to support the economy."

     Over the past few months, the yield gap between the U.S. and Japan has been

of little interest to financial markets and had little effect of the yen's

level. In recent weeks, the biggest problem for the BOJ appeared to be a rapidly

weakening yen, as dollar-yen rose to JPY112.20 on Feb. 28, before falling as low

as JPY107.50 on Friday.

     Any sharp increase in the yen from these levels will increase speculation

that the BOJ will cut its short-term interest rate further into negative

territory from the current -0.1%, despite the central bank's concerns of the

side effects.

     Although recognising the growing downside risks from the spread of the

coronavirus, the BOJ still sees the economy on a road to recovery in the medium

term and had been prepared to stand pat so long as there was little impact on

the yen.

     A sharp increase in the yen's level from here would put further downward

pressure on the stock market, pushing sentiment lower.

--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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