MNI STATE OF PLAY: BOJ Easy Policy To Shoulder Past Weaker Yen

The Bank of Japan made it clear on Thursday that achieving the 2% price target will not be hindered by a weaker yen, although the negative impact of a softer currency on the economy is a concern, MNI understands.

Despite the weaker yen, the BOJ decided to maintain its easy policy and leftits easing bias of monetary policy in the forward guidance unchanged as expected: see: MNI STATE OF PLAY: BOJ To Hold Despite Higher Prices Outlook.

“For the time being, the BOJ will closely monitor the impact of Covid-19 and will not hesitate take additional easing measures if necessary, and also it expects short- and long-term interest rates to remain at their present or lower levels.”

YEN REACTION

The BOJ’s decisions brought on some yen selling pressure, sending the dollar to the JPY130.76 level, the weakest in 20 years, see: MNI INSIGHT: BOJ To Look Past Yen, Keep Guidance.

BOJ Governor Haruhiko Kuroda however said holding steady on Thursday was not the cause of a weaker yen, adding it is undesirable to comment on daily market moves, though rapid changes in foreign exchange rates increase uncertainty and make it difficult for businesses to plan.

JGB PURCHASES TO DIMINISH SPECULATION

Furthermore, the BOJ clarified guidelines for the unlimited purchase of Japanese government bonds at a fixed-rate to cement the view that there is no plan to raise interest rates to curb a weaker yen.

Kuroda also said that the decision of offering a fixed-rate bond buying operation every day is aimed at diminishing market speculation.

“If the 10-year bond yield approaches to 0.25%, (an upper end of the BOJ preferred range), market players will speculate whether the BOJ would conduct a fixed-rate bond buying operation or not. Today’s decision is aimed at brushing off such a speculation,” Kuroda told reporters.

INFLATION OUTLOOK

Policymakers expect Japan’s core inflation rate to temporarily rise around 2% this fiscal year but the rate of increase is expected to decelerate as higher energy costs driving the cost-push inflation are likely to wane.

The BOJ board’s median forecast for core CPI this fiscal year was revised up to +1.9% from January’s +1.1%. But the BOJ is still far from the achievement of its sustained 2% price target and is not expected to join major central banks in reversing easy policy to normalisation to rein in inflationary pressures.

The BOJ first needs to see strong wage hikes driving inflation higher along with economic growth. For now, the BOJ statement said the economy has continued moving in line with the baseline scenario despite economic uncertainties and downside risks.