MNI INTERVIEW: BOJ Can Live With Modest Yen Fall; Ex-BOJ Aide

The Bank of Japan will look through any further modest yen decline though it is unlikely the currency will weaken sufficiently to prompt a policy response, a former senior official told MNI Monday, without elaborating on what level would spur the central bank into action.

"Judging from the existing conditions, an acceleration of a weakening yen move is unthinkable," said Hiroshi Ugai, now managing director and chief economist at J.P. Morgan in Tokyo.

"Our strategist expects the dollar to trade at around JPY111 in the fourth quarter, slipping to around JPY112 in the second quarter next year," said Ugai, who filled many senior roles at the BOJ including in its international division in a career that spanned 30 years until 2014, when he left for a professorship at Hitotsubashi University.

Last week, the yen traded at JPY111 against the dollar, the weakest since March 2020, but it firmed to JPY110.68 on Monday.

Historically, BOJ officials have been more sensitive to yen strengthening, which hits consumer sentiment and stock prices. But now its concerns focus on the impact of higher import prices on company profits, Ugai said, though he added that overseas demand for goods is solid and that the economy remains on its current path towards moderate recovery.

If the yen did regain upward momentum, Ugai said the BOJ would be unconcerned until dollar-yen traded close to JPY100, with recent survey data pointing to JPY99.8 as the breakeven level for major exporters. Although currently unlikely, if the pair did trade below JPY95, "the BOJ will not leave it alone," he said.

Ugai offered no insight as to what the bank could do if the yen weakens too far. The BOJ's likely response to too strong a currency, in contrast, has been well flagged, with Governor Kuroda having indicated that it could cut rates further into negative territory

INFLATION OUTLOOK

Turning to the subject of inflation, Ugai said that consumer prices continue to be pressured by low mobile phone charges but the underlying trend excluding special factors is solid.

"Looking ahead, the government may resume the Go To travel campaign around autumn time. If it is, it will lower the consumer price index by 0.5 percentage point, and the inflation rate may fall from a year earlier," he said.

However, the underlying trend has been improving since late last year.

"Key price data will continue to rise as a trend but it is unlikely to hit 1% and inflation expectations will not rise. The focus is on how prices will be boosted by a strength of economic recovery," he added.