MNI PREVIEW: BOJ To Hold; May Tweak Guidance On Yen Rise Worry

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan is set to keep policy unchanged at the July

meeting, maintaining the view that the economy will pick up later this year,

despite growing downside risks, MNI understands.

     With the BOJ judging the virtuous cycle from corporate profits to spending

is still in place, it sees little need to strengthen forward guidance unless the

outlook changes quickly on the back of fresh financial market volatility.

     The BOJ wants to keep its powder dry, with spare policy room to use if the

risks identified crystalize and lead to a sharp downturn in both activity and

prices.

     --YEN RISE WORRY

     There is some concern that no action could be interpreted wrongly as a

signal of BOJ caution over side-effects from additional easing, particularly if

the decision is taken as the U.S. Federal Reserve cuts the Fed Funds target

rate, which could strengthen the yen.

     Most BOJ officials seem to accept that markets have already priced in a 25

bps Fed cut from the FOMC when its next meeting ends on July 31 -- a day after

the Japanese policy announcement -- and barring a surprise large cut or dovish

signal from Washington, the yen will not strengthen.

     --STRENGTHENING FORWARD GUIDANCE

     The BOJ may consider extending the period of the forward guidance from

"until at least around spring 2020" as a pre-emptive move to stop upward

pressure on the yen, as it could help strengthen foreigners' view on the easy

policy, whilst at least offering a nod that the bank stands ready to conduct

easy policy without concern on additional side-effects.

     BOJ Governor Haruhiko Kuroda has already said the BOJ considers "there is a

fair possibility that the current low interest rates will be maintained beyond"

around spring 2020 depending on future developments.

     --FORECASTS

     The BOJ will also lay out its latest forecasts at the July meeting.

Policymakers are unlikely to amend April's 1.6% inflation forecast for FY2021,

unchanged in the view that momentum toward achieving the 2% target is

maintained.

     There is certainly some concern at the Bank that an ongoing slowdown in

exports will eventually weigh on domestic demand, hitting the service sector,

which will have a follow through hit on the virtuous cycle as sentiment and

investment slows.

     The BOJ doesn't have a clear-cut answer on how long weak overseas demand

continues and how long domestic demand remains solid.

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

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

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