MNI POLICY: BOJ Eyes Yen Rise, Comfort From Nikkei Gains

The Bank of Japan is taking current yen strength against the U.S. dollar in its stride as it sees the greenback weaker against a basket of currencies, although officials will monitor the situation, MNI understands.

Concern normally builds at the BOJ when the yen strengthens and weighs on stock prices, pushing the Nikkei 225 lower and depressing investor confidence. However, despite the yen's gains to Y103.45 in New York on Thursday, The Nikkei closed at a near three-decade high 24,325 in Tokyo trade Friday,

However, levels of concern will increase at the central bank if the yen extends its gains towards the Y100 level where it could have a greater impact on exporters, worsening the country's economic fundamentals.

As normal, focus is on the pace and underlying reasons for any move are as important as any actual level. At present, the move is seen as a safe-haven flow out of the dollar and not a fundamental shift, with BOJ officials seeing current similarities in U.S./Japan monetary policy as a stabilizing factor for further gains

POLICY OPTION

A move towards or through JPY100 would increase pressure on the BOJ to consider action, triggering renewed speculation of a further cut in the short-term policy rate from -0.1%. This is certainly not a preferred move for the Bank, as concerns remain over possible side effects, including lowering banks' profitability, which could destabilize the financial system.

That means any cuts – if forthcoming -- would need the BOJ to introduce measures mitigating the negative impact of a cut on commercial banks and the wider financial system.

Bank officials are analyzing that a continuous yen's rise is unlikely, judging from no rate differential between the U.S. and Japan, and the same direction of monetary policy by the U.S. Federal Reserve and the BOJ.