MNI INSIGHT: BOJ May Ease Policy If Yen Strength Hits Economy

--BOJ May Cut Overnight Rate Deeper Into Negative Territory If Yen at Y100

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan won't conduct additional monetary policy

easing on first signs of a slowing economy, but will consider cutting rates

further into negative territory if the yen strengthened appreciably, MNI

understands.

     Although the pros and cons of additional easing are still a concern to

policymakers, further measures could be enacted if the yen rose rapidly to

around Y100 against the dollar from current levels just above Y110.

     Although not addressing any specific levels, BOJ Governor Haruhiko Kuroda

told a parliamentary committee Tuesday the Bank will consider additional easy

policy if exchange rate moves hinder attempts to hit the 2% inflation target.

     A rapid yen rise, if it materializes, will prompt the BOJ to once again

examine the pros and cons of their extended easing policy, then consider

deepening the negative interest rate from -0.1%. If they cut the benchmark

overnight rate to -0.2%, to mitigate against unfavourable effects, they will

consider raising the deposit rate on certain excess reserves to +0.2% from

+0.1%.

     This move will help overcome some concerns at the BOJ that a deepening of

the negative rate will further squeeze banks' lending margin, as banks funding

their lending via deposits cannot easily lower their rate into negative

territory.

     --U.S ECONOMY VITAL

     As China's economy slows, there is a concern for BOJ economists that Japan

could be hit by slowing exports, in turn weighing on domestic industrial output

and capital investment. However, this is less of a concern if the U.S. economy

remains resilient.

     But a sharp slowdown of the U.S. economy remains a key risk to the Japanese

economy, as it will impede a second major area for exports.

     If the U.S slows, the Fed will likely stall, possibly reverse, its recent

tightening cycle, which will possibly weigh on the dollar and send the yen

higher. 

     A stronger yen will dampen stock prices, weigh further on exports and hit

both consumer and corporate sentiment, impacting what the BOJ sees as the

'virtuous cycle' between corporate profits and spending.

     BOJ economists remain focused on Japan's exports of capital goods and

IT-related goods to both the U.S. and China end Q1, still hoping for a moderate

upward trend as the global recovery in capital investment continues, although

the quarter's underlying trends could be difficult to see due to the Chinese New

Year holiday.

     The BOJ board will release the medium-term growth and inflation forecasts

through FY2021 at the April 24-25 policy meeting, having seen much of the Q1

data, but will await Q2 for a full glimpse of the underlying trends.

--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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