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MNI INSIGHT: BOJ May Extend Guidance Duration If Economy Slows
--Further Yen Strengthening Would See BOJ Mull Additional Rate Cut
By Hiroshi Inoue
TOKYO (MNI) - A slowing domestic economy and a stronger yen will push the
Bank of Japan into considering further easing, with an extension of the forward
guidance duration a favoured way to initially address declining demand at home,
If slower overseas demand feeds through from weaker exports and lower
industrial production into lower consumer spending and corporate capital
investment, the BOJ could boost its forward guidance, extending the duration
again from "until around spring 2020" out to the autumn or even the end of 2020.
One benefit in extended guidance for the BOJ is that it will be aimed at
the real economy and have only limited impact on the markets, meaning the
central bank can adopt it without over concern of additional side effects for
financial institutions -- a major concern for policymakers.
A rapid strengthening of the yen from current levels would be a different
problem for the BOJ, and it would then have to consider pushing short-term
interest rates deeper into negative territory from the current -0.10% or further
widening the acceptable 10-year JGB trading band between -0.20% and +0.20%.
There is a concern amongst BOJ officials that policy easing by the Federal
Reserve and the European Central Bank could push the yen below Y105 against the
dollar. Dollar-yen traded as low as Y106.80 on Tuesday, down from Y108.30 in
mid-June and Y110.50 in late 2018.
The average predicted exchange rate by major manufacturers for the current
fiscal year was Y108.87, according to the March Tankan survey and rates below
that level could impact on their profitability.
The BOJ used negative rates in 2016 as a measure to directly curb a
stronger yen and it was seen as a successful move. But it exacerbated the
squeeze on banks' profits caused by ultra-low rates and trying to minimise those
side effects will be a key consideration for the Bank.
Governor Haruhiko Kuroda has continuously cited four policy options the BOJ
could pursue, with expanding asset purchases and accelerating growth in the
monetary base alongside extended guidance and further rate cuts.
Chatter that the BOJ could extend loans directly to commercial banks at
negative rates has been downplayed by officials, as it would be detrimental to
lenders, with corporate borrowers looking for direct follow through and loans
with rates below zero.
--MNI London Bureau; tel: +44 203-586-2225; email: email@example.com
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