MNI INSIGHT: Govt Pressures Add To Weak Yen As BOJ Eyes Change

Pressure from the government to do something about inflation is adding to the likelihood that the Bank of Japan adjusts its easy monetary policy around the autumn, with a first baby step possible at the July meeting when it could tweak its statement to remove a reference to the Covid pandemic, MNI understands.

While concerns that the economy will remain weak have led the BOJ to so far confound market speculation that rising global rates and a weakening yen could force it to adjust its policy, centred around maintaining a 0.25% upper limit on 10-year government bonds, officials now see a chance that currency depreciation could push inflation to around 3%, boosting price expectations and feeding wage growth into next year. This could allow a modification of easy policy after the summer. (See MNI INSIGHT: BOJ Eyes Autumn Move If Yen Steadies, Prices Rise)

At the same time, officials may not be able to ignore government calls for it to respond to inflation, given that Prime Minister Fumio Kishida will have a chance to reshape the BOJ after Governor Haruhiko Kuroda’s second term ends next April and two deputy governors also see out their own terms in March. Political manoeuvring to identify possible successors is likely to start after elections to the upper house of parliament on July 10.

GUIDANCE

In July the BOJ is expected to consider removing the words “closely monitoring the impact of Covid-19”, in what would potentially be a first step towards a more significant adjustment, to modify or even cut phrasing that it “expects short- and long-term policy interest rates to remain at their present or lower levels.” The government has already made a similar move, removing “needs to monitor the impact of Covid-19” from its June monthly economic report in June.

Before deciding whether to take away the Covid reference, however, BOJ officials might prefer to wait until September, by which time they will have seen second-quarter gross domestic product data due on Aug. 15.

Any further changes to the language will have to overcome a much higher bar, with officials sensitive to the risk that markets might perceive such moves as a weakening of easy policy. And, for the moment, there is little chance that the BOJ would add to its statement any reference to growing economic “momentum.”

The BOJ is tending towards not extending a special lending programme to support smaller firms, which is set to expire on Sept. 30. A decision though might not come until the September meeting, and officials will also take any government measures to support firms into account.