MNI INSIGHT: BOJ Sees JGB Tweaks Only Short-Term Impact On Yen

A wider yield curve control range for the 10-year Japanese Government Bond (JGB) or a focus on a shorter-dated tenor would at best have a short-lived impact on the yen's level against the USD, which is now driven by an expected increasingly wide interest rate gap to U.S Treasuries, MNI understands.

Still, the weaker yen is a major policy issue for the Bank of Japan as it works to keep the current easy policy and a plus/minus 0.25% 10-year range intact and mitigate a squeeze on corporate profits and downward pressure for the economy, particularly for importers.

However, unless the BOJ substantially changes its policy language of trading the 10-year JGB “around zero percent” by citing reasons that it would bolster the economy and tame price moves it is unlikely to widen the range, MNI understands.

POLICY OPTIONS

The range of policy options on the yen for the BOJ is narrow, with any intervention decided by the Ministry of Finance, which normally seeks a U.S. nod on stepping into the FX market to avoid miscommunication on exchange rates.

Market participants regarded JPY125 as a key level, and BOJ officials have shown concern over a rapid depreciation, but also mostly cautioun on calls for action. The yen briefly crossed 126.00 to the USD to a two-decade high of JPY125.26, on Wednesday and traded at a high of JPY125.70 in morning Tokyo trade on Thursday, see: MNI INSIGHT: BOJ Left With Jawboning As Yen Weakens.

There are arguments in financial markets, and among former and current policymakers, that the BOJ should widen the 10-year interest rate range or tolerate it above 0.25% after it defended the level at the end of the past fiscal year in March. This could curb a weaker yen by narrowing the interest rate gap between the U.S. and Japan at least temporarily.

FED, BOJ AHEAD

But the Fed appears poised to raise its policy rate by 50 basis points as early as May with more tightening ahead, minimising any short-term BOJ adjustment.

Another concern for the BOJ are government calls to fight the weak yen and keep in step with stimulus measures to cushion higher costs for petrol and energy ahead of an upper house election this summer, which could be discussed by the board at the end April policy meeting, see: MNI INSIGHT: BOJ Mulls New Easy Policy Language Before Holiday.