MNI PREVIEW: BOJ Likely On Hold For Now; Eyes On Fed and Yen

By Hiroshi Inoue

     TOKYO (MNI) - Unless financial market volatility picks up in coming days,

the Bank of Japan is set to keep monetary policy unchanged next week -- and it

doesn't expect sharp market swings unless the U.S. Federal Reserve deviates

significantly from an expected 25bps rate cut when it meets next week.

     BOJ policymakers see no immediate need for further easing, as domestic

demand continues to underpin the economy, although they accept there are growing

and accumulating downside risks to both activity and prices.

     The BOJ will study several policy options at its 2-day policy meeting that

ends Sept 19, including how best to deal with any excessive yen appreciation

following a bigger-than-expected Fed cut.

     --PREPARE FOR YEN RISE

     The dollar traded at around Y108.15 in Tokyo trade Friday and the BOJ will

tolerate some strength without considering further easing. In late August,

dollar-yen traded at Y104.46. 

     However, a sharp yen rise toward Y100 will increase downside risk on

Japan's economy and could derail both the recovery path and momentum towards the

2% price target -- and the Bank has already stated it "will not hesitate" to act

if there is a probability than momentum will slow.

     BOJ officials in the monetary policy division will lay out options for the

board to consider if a larger than expected Fed cut pushes the yen higher. One

option is still a cut in overnight rates from the current -0.1%, but that would

boost concerns over side-effects from negative rates.

     --JGB YIELDS

     The 10-year Japanese government bond traded at -0.175% on Friday, after

falling to -0.295% on Sep 4, beyond the central bank's unofficial range of

-0.20% to +0.20%.

     The BOJ know they must assess recent yield moves, but are uncertain as to

how to incorporate their views into the September policy statement. Policymakers

will also discuss the drop in super long-term bond yields, currently squeezing

profits at commercial banks, a situation the BOJ sees as undesirable.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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