MNI INSIGHT: BOJ Eyes Autumn Move If Yen Steadies, Prices Rise

The Bank of Japan could adjust its easy monetary policy around the autumn if the yen stabilises at a lower level around 140 to the dollar, sending inflation to temporary peaks near 3% and driving wage hikes into 2023, MNI understands.

But the BOJ will wait until it sees confirmation of a tighter labour market and of economic recovery from Covid before any move, and officials will not want to be seen to be responding to yen weakness in itself, for fear of prompting further speculative attacks as the Federal Reserve continues to raise U.S. rates.

The dollar rose to 136.71 yen in New York on Tuesday, the highest level since October 1998 on the back of a widening interest rate gap between the U.S. and Japan, prompting market speculation that reaching 140 might prompt the BOJ to take action such as raising its 0.25% yield ceiling on 10-year government bonds.

BOJ Governor Haruhiko Kuroda has repeatedly said that the BOJ does not target the exchange rate, and officials have so far held policy at ultra-easy levels despite currency depreciation, seeing the economy as too weak to cope with even slight tightening. (See MNI INSIGHT: Weak Economy Ties BOJ To Easy Policy As Yen Sinks)

But if the yen stabilises around 140, it would drive inflation towards 3% and push price expectations higher, they now calculate.

Officials are hoping that the path of U.S. monetary policy will become clearer in or after September, guiding the BOJ’s own actions