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The Bank of Japan sees potential for upside risks for the U.S. economy with a higher subsequent inflation rate as increased stimulus measures are rolled out, which will help strengthen the dollar and take pressure off the yen rising further, MNI understands.
Officials at the BOJ still see considerable downside risks to the outlook as well, with a particular concern over any correction in U.S. credit markets that have been buoyed by accommodative Federal Reserve monetary policy.
Some bank officials are concerned over the risk that the yen could break below JPY100 against the dollar following the pair's dip to JPY102 in early January as they are not convinced that the BOJ has an effective tool to curb the currency's rise.
If the dollar dips below JPY100, both corporate and household sentiment would fall, even if the downturn was short-lived, giving the BOJ further reasons for concern.
Corporate credit spreads have tightened to pre-coronavirus levels as investors increase purchases as they chase higher returns after the fall in U.S. Treasury bond yields.
The U.S. 10-year bond yield rose above 1.00% in early January for the first time in 10 months, trading at 1.13% on Monday for the highest level since March. To date, the impact of higher UST yields on JGB yields has been limited, helped by the BOJ's JGB buying operation.
Officials will continue to monitor the situation, noting that any continued rise in 10-year yields will likely increase pressure on the Fed to strengthen easy policy, particularly buying longer-end Treasuries.