MNI INSIGHT: BOJ Watchful Over U.S. Election Impact On Yen

Bank of Japan officials see any risk to domestic financial market stability as resulting from developments overseas rather than at home and are particularly watchful over any impact from the U.S. presidential election outcome and how it affects the dollar/yen rate, MNI understands.

The yen strengthened after the U.K.'s Brexit decision and the U.S. presidential election, both coming in 2016, and going against market consensus, and there is at least the recognition that another upset is possible in November.

JPY100 WORRY

However, Bank officials see only a slim possibility of a repeat strengthening this time, as the BOJ's easy policy is balanced by the Fed's reluctance to introduce negative rates and history has shown that the yen usually strengthens when the BOJ lags the Fed in accommodative policy.

Still, bank officials in charge of policy planning are considering options that could be used should the currency strengthen through JPY100 against the dollar.

Deepening the short-term policy interest rate from -0.10% could be effective. Governor Haruhiko Kuroda has often referred to this option to prevent market players expecting the BOJ to retreat from its easy policy. But he sees a high bar for such a move, according to sources familiar with BOJ thinking.

There also side-effects to consider, such as a drop in stock prices and public sentiment, but officials believe the BOJ will be able to cope with such a drop and a rise in interest rates under the current policy framework.