MNI INSIGHT: BOJ Sees Little Risk Of Yen Spike After Fed Shift

The Bank of Japan sees only minimal risk of the yen strengthening rapidly against the U.S. dollar following the Federal Reserve's recent policy shift, as officials at the central bank think financial markets accept that Tokyo isn't lagging when it comes to ultra-easy monetary policy, although Japanese policymakers stand ready to act if the situation changes, MNI understands.

Officials at the bank think markets judge the BOJ is unlikely to unwind its current accommodative stance before the Fed starts to tighten – even if that point is at some distant date.

However, the BOJ remain watchful of how the forex markets react to the Fed's decisions, knowing a sharp, rapid yen rise will further worsen both economic fundamentals and the fight against deflation.

DEEPER DIVE

Deepening the short-term policy rate from -0.1% is still regarded as an effective tool to fight the yen's rise beyond JPY100, if needed, although the BOJ understands both the pros and cons would need consideration, although moves to address excess reserve and the special lending facility balances has helped banks' profitability somewhat.

The BOJ has committed to increase the monetary base until its 2% price target is hit 'in a stable manner', but policymakers haven't formally said they won't raise interest rates until the goal is achieved, which perhaps leaves them that as a future guidance tool.

Across the BOJ, the Fed's shift to an average inflation target is seen as a similar objective to its own goal of hitting a 2% target 'in a stable manner', which allows for variations either side of the target over the medium term.

The Fed's decision clearly reflects its serious concerns about weaker inflation and perhaps some softening in its traditional view that the inflation rate should be anchored at 2%, BOJ officials feel.

FED WATCH

Now the Fed has 'clarified' its position of price stability, the BOJ is now focusing on how the Fed will try and achieve its goal and – more importantly perhaps – whether it has the ability and tools to do so.

But as a direct impact for the BOJ, officials expect the Fed will not hit its targets easily but if it succeeds in raising inflation expectations, that would contribute to strengthening the dollar, taking pressure off of the yen.

Although asset prices have fluctuated sharply around the globe in recent months, the dollar/yen has been moved in a tight range.

The dollar traded at around JPY106.20 in Tokyo trade Thursday, close to the middle of its albeit wide decade-long trading range. The dollar had traded at around JPY85 in late 2012 when Prime Minister Shinzo Abe took office, hitting a high around JPY125 in mid-2015.