MNI POLICY: BOJ Stays On Sidelines As Yen Weakens

The break of the yen through 155 to the dollar is insufficient to prompt any immediate rate hike by the Bank of Japan, though it continues to monitor exchange rate depreciation for an inflationary boost which could prompt monetary tightening by as early as its June meeting, MNI understands.

While the Bank expects a lower yen to prompt an inflation rebound by the northern summer, potentially justifying an increase in its overnight rate from its current range of zero percent to 0.1% to a range with an upper limit of 0.25%, it is aware that it cannot be seen to act based on foreign exchange considerations alone, lest it prompt more speculation. (See MNI POLICY: BOJ Sees Risk of Earlier Inflation Rebound)

The yen has fallen to its lowest level since 1990 around JPY155.50 as investors roll back expectations for Federal Reserve rate cuts, with markets alert to any signs of dollar sales by the BOJ, which would come under instruction from the Ministry of Finance.

But Japanese officials are conscious that yen purchases would only slow but not reverse selling driven by U.S.-Japan rate spreads, and that any such action would only be effective if the market loses confidence in the underlying trend.

A weak yen would push up some import costs, but any increase in domestic prices could also dampen household consumption. The BOJ still calculates that an easy policy stance is required to meet its 2% inflation target by the end of its projection period, after raising its overnight rate from negative levels and ending yield curve control in March.