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,

MNI understands.

     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.

     --NEGATIVE RATES

     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.

     --OPTIONS

     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: les.commons@marketnews.com

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