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MNI INSIGHT: BOJ Sees Limited Yen Gain Risk on Fed Sept Meet
BOJ Officials Preparing Contingency Plans For Dollar-Yen Break Below JPY 100
Hurdles To Deepen Negative Rate Higher Than Before
The Bank of Japan doesn't expect the yen to strengthen significantly in the wake of the U.S. Federal Reserve's September meeting, even if Fed Chair Jay Powell announces the outcome of its monetary policy strategy review, MNI understands, although officials are preparing contingency plans for a potential dollar-yen break below 100.
The BOJ currently sees the balance of probabilities pointing towards no great surprises from Powell when he finally lays out the findings. Although the Fed has set no firm date for any announcement, speculation is increasing an announcement could come at the mid-Sept meet after Powell recently said deliberations will be wrapped up in the near future.
Yen strength is always a concern for the BOJ and with the economy currently reeling under the strain of the coronavirus pandemic, a higher yen would just add to the problems.
Although not expecting the yen to strengthen appreciably in the near future, the BOJ monetary policy department are looking at possible measures to cope with any currency strength that sees dollar-yen break below 100 – often seen as Tokyo's line in the sand.
MITIGATING ACTION
Deepening the short-term rate further into negative territory from the current -0.10% is seen by the BOJ as its most effective tool to fight the yen's rise, but it has known and concerning side-effects, including lowering banks' profits, which officials believe will be amplified by further cuts in current circumstances.
That leaves officials looking for mitigating measures to enact alongside any deepening of the short-term policy rate to offset the impact on banks -- if and when action is needed.
The Fed is reviewing monetary policy strategy, tools and communication practices and the financial markets see the outcome as Washington keeping a low rate policy for a prolonged period and to clarify forward guidance for policy rates tied to goals such as an average inflation target.
This will see both the BOJ and the Fed in highly accommodative mode for a prolonged period.
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Why MNI
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