MNI POLICY: BOJ Sees Limited Risk Of Yen Rising After Fed

Bank of Japan officials are sensitive to the risk of the yen's move following events but they see limited scope for the currency to strengthen after the U.S. Federal Reserve's policy decision next week in the absence of supporting factors, MNI understands.

There is speculation that the Fed may boost its easy policy at its Dec.15-16 meeting.

Even if the yen does appreciate against the dollar after the Fed decision, the trend will not hold as the BOJ, like the Fed, has vowed to maintain its easy policy for a prolonged period and there is no interest rate differential between Japan and the U.S.

The view of BOJ officials is that the dollar would mostly continue to move in a range of JPY103 to JPY105 with some fluctuations, regardless.

STOCK PRICES

As always, the underlying reasons and pace of any move are as important as the level. Concern tends to build at the BOJ when the stronger yen starts to weigh on stock prices, pushing the Nikkei 225 lower and depressing investor confidence.

In a shift, the yen has remained strong in recent weeks despite the risk-on attitude of investors. The Nikkei stock index has been supported by the rise in U.S. stock prices as well as recent developments on the vaccine front, which have raised recovery hopes.

As for recent dollar/yen moves, BOJ officials see continued demand for both the dollar and the yen as safe haven currencies.

Among the moves, the yen is comparatively stronger. The yen appreciated sharply during the global financial crisis and the massive earthquake in east Japan in 2011 as foreign players aggressively unwound their yen selling positions.

At that time, Japan's interest rates were lower than those of other central banks, prompting foreign players to borrow yen and invest in non-Japanese financial assets, triggering the yen carry trade.

This time, the carry trade volume hasn't increased as policy rates in advanced economies are effectively at zero. However, demand for the yen as a safe currency remains.