MNI INSIGHT: Yen At 150 Would Put Pressure On BOJ

The Bank of Japan fears it may come under increasing political pressure to shift its policy bias to neutral from easing should the yen fall to 150 to the dollar, given the government’s lack of an effective tool to support the currency, MNI understands.

BOJ officials are worried such a shift could be wrongly interpreted as an unwinding of its easy policy stance. The Bank’s preference is for the economic recovery to continue to build after returning to pre-Covid levels. There are also downside risks from slower global growth. (See MNI INSIGHT: BOJ Unmoved by Rising Inflation, Slumping Yen)

The BOJ would also prefer Japan’s output gap to close before considering any change in stance. The output gap was estimated to be -1.21 percentage points in the January-March period, narrowing from the -1.47 pp in Q4. It was the eighth consecutive quarterly negative output gap.

The debate about how to curb weakness in the yen as it trades near a 24-year low against the U.S. currency comes ahead of the BOJ’s policy meeting on Sept 21-22. While it may tweak forward guidance for policy rates, it is likely to maintain its easing bias.

YEN FEEDING INFLATION

Japanese authorities are worried that if the yen weakens to 150 it will darken the outlook of businesses and households, worsening economic fundamentals. The weak yen is feeding into higher inflation.

The yen traded at around 143.03 on Thursday after falling to 144.96 in early Tokyo trade on Wednesday amid concern over a potentially larger-than-expected 100bps hike by the Federal Reserve following the surprisingly-strong August consumer price index.

The BOJ conducted “rate-checking” in foreign exchange markets on Wednesday, a move viewed as a precursor to actual intervention. However, the Ministry of Finance must coordinate with the U.S. Treasury on any intervention, and it’s uncertain whether Washington would agree to dollar sales.

Japan could intervene alone but its effect on the dollar-yen rate would be limited. The yen’s weakness is only likely to slow once markets start pricing less aggressive U.S. hikes or if the BOJ raises interest rates.