MNI POLICY: BOJ Takes Yen Rise In Stride; August Gains Concern

The Bank of Japan is taking the yen's recent rise in its stride, seeing the move as steady and in line with global developments, although officials are watchful that gains don't accelerate towards the JPY100-level in thin August trading conditions, MNI understands.

Dollar-yen traded at JPY105.60 in late Tokyo trade after falling to JPY105.39 on Monday, the lowest level in four months.

Any dip JPY100 would be seen by the BOJ as potentially critical, as it would likely weigh on the Nikkei 225 and further dampen both corporate and household sentiment.

Alongside a second wave of the coronavirus, the BOJ sees a stronger yen as the biggest threat to the Japanese economy, with a sharp rise likely to undermine the smooth functioning of financial intermediation.

OPTIONS UNCLEAR

It is unclear what measures the BOJ would use to fight unwelcome yen strength, but a deepening the short-term policy rate further into negative territory from -0.1% is one option and the tool the bank used in January 2016 to fight the yen's rise -- and led to the introduction of yield curve control in September of that year to address some of the side effects of negative rates.

Although BOJ Governor Haruhiko Kuroda has repeatedly cited lowering the policy interest rates as one option, expanding its range of asset purchases is seen as a more likely response, although the jawboning is likely to continue as he will want to prevent speculation building in financial markets that this is no longer a policy option, triggering a yen rise.