MNI INSIGHT: BOJ Watching Multi Yen Rise Risks Amid Trade Rows

--BOJ Sees Yen Rise To Hurt Economy, Complicate JGB Operations 

By Hiroshi Inoue

     TOKYO (MNI) - In analyzing the impact of U.S. trade disputes, Bank of Japan

officials believe safe-haven buying of the yen to be triggered by an escalation

in the frictions would be the worst nightmare for Japan since it would hurt

sentiment and undermine the positive growth mechanism, MNI understands.

     Such an exchange rate move would also complicate the BOJ's bond purchase

operations. A higher yen tends to cause a drop in yields and prompt to the bank

to lower purchase amounts but it wants to avoid causing speculation that it is

tapering, which then could cause the yen to rise further.

     The officials expect heightened concerns over a trade war on global demand

would initially cause risk-off mode but at the same time, they believe the yen's

rise would be somewhat eased by a stronger dollar against the euro and the

currencies in the emerging economies during the U.S. rate hike cycle.

     A weaker euro on Italian political turmoil is also expected to help support

the dollar, indirectly limiting the yen's rise.

     BOJ officials are watching how the U.S.-China trade row will evolve around

July 6, when U.S. tariffs on 25% on an initial $34 billion worth of Chinese

imports are due to take effect.

     --YEN RISE RISK

     Among various risks, a stronger yen would be the worst one for business

sentiment and economic growth in Japan, BOJ officials judge.

     "[The BOJ] is vigilant against the risk of a higher yen as it would worsen

the economic and price conditions," a person who is familiar with BOJ thinking

said, adding that it would also deal a heavy blow to the virtuous cycle from

higher corporate profits and investment to firmer income gains and household

spending,

     Under the worst-case scenario, the BOJ would face the need to consider

conducting additional easing to safeguard the economy and the path to 2%

inflation against the appreciation of the yen, although additional easing may

not stem the yen's rise, he said.

     The dollar was stable around Y110.50 on Friday, sitting in the middle of a

range of Y105 to Y115, which is considered comfortable for Japanese

policymakers.

     The average of exchange rates expected by large manufacturers in the

current fiscal year to March 31, 2019 is Y109.66, according to the BOJ's Tankan

business survey for March.

     --YEN-YIELD RISK

     The appreciation of the yen can give the BOJ another headache when it is

trying to maintain a bond yield curve that is appropriate for guiding low

inflation to the bank's 2% target, another person who is familiar with BOJ

thinking said.

     A yen rise would also push up the prices of Japanese government bonds,

exerting downward pressure on yields, which then would increase pressure on the

BOJ to reduce the scale of its purchases of JGBs, a move aimed at preventing

yields from falling too fast.

     But the BOJ must avoid speculation that it is tapering as it could cause

the yen to rise further.

     The yen firmed in January, when the BOJ trimmed the size of its JGB

purchase, partly because some investors thought the BOJ would follow other

central banks in unwinding large-scale easing.

     But the currency markets didn't react much to the three BOJ decisions this

month, including Friday's, to lower the per-operation scale of its JGB buying.

     However, there is no guarantee that the yen will remain calm every time the

BOJ decides to lower the scale of its JGB purchase, the second source said.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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