MNI POLICY: BOJ Concern Risk-On To Reverse If Economy Weakens

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials think financial markets may be

getting ahead of themselves, pricing in a solid and quick economic recovery,

despite the downside risks still around, MNI understands, which risks a

destabilisation of financial markets if investors quickly reverse course.

     The BOJ is also concerned that a downturn in financial markets will weigh

further on both investor and consumer sentiment, helping feed a negative

feedback loop which could prompt Japan's monetary authorities, including the

BOJ, to consider additional measures.

     At present, helped by massive monetary and fiscal stimulus form global

authorities, the BOJ sees financial markets acting normally, with no undue

pressure points.

     A weaker Nikkei stock index will push the BOJ to increase its purchases of

ETFs (exchange-traded funds) and a rising yen will see the central bank again

consider lowering the short-term policy rate from -0.1%, although its not keen

to do so as along with addressing yen strength, it will squeeze bank

profitability and put further pressure on their stock prices.

     The BOJ introduced yield curve control in Sept 2016 to mitigate the

unfavorable effects of the negative rate policy announced in Jan that year as a

measure to curb the yen's rise.

     --INVESTORS' OPTIMISTIC VIEW

     The stability of financial markets is also underpinned by investor

sentiment that believes the relevant Japanese authorities will prevent financial

institutions bankruptcies in order to maintain the stability of financial

system, the BOJ believes.

     Investors have bet big on stocks hoping central banks will keep the

monetary taps turned on, encouraging investors to buy risk assets.

     The view is broadly shared by investors that advanced economies have been

hardest hit by lockdowns in the second quarter but their economies will

gradually improve.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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