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BOJ sees weak-yen effect of YCC well worth the trouble
December 16, 2016 / 12:53 PM / a year ago

BOJ sees weak-yen effect of YCC well worth the trouble

* BOJ happy with lucky break brought by Trump, YCC

* Bigger risk for BOJ is still yen spike, not fall

* Yen fall, oil rise may push inflation near BOJ goal

By Leika Kihara

TOKYO, Dec 16 (Reuters) - While surging global bond yields are hampering the Bank of Japan’s efforts to cap long-term interest rates, a broad U.S. dollar rally is helping the central bank’s new framework achieve what matters most: a weakening yen.

Yen falls help the central bank as it gives Japan’s export-reliant economy a much-needed boost that can spur business investment. It does also make imports costlier, but that could help push inflation towards an ambitious 2 percent target - a combination the BOJ would welcome as long as households can manage the rising cost of living.

All the same, policymakers are not yet fretting over the recent yen falls, and see an abrupt reversal of the weak-yen trend as a bigger threat, say people familiar with BOJ thinking.

“There’s so much uncertainty on (U.S. President-elect Donald) Trump’s policies, which means there is no guarantee current market moves would be sustained,” said one of the sources, noting the yen could easily spike back up and sour business sentiment in Japan.

“It’s too early to worry about excessive yen falls,” said another person, who spoke on condition of anonymity.

The yen’s steep decline mirrors falls in other major currencies against the dollar, which has been supercharged since Trump’s election win last month, on bets the incoming administration will boost fiscal spending and economic growth.

The U.S. Federal Reserve signal this week that it would raise rates next year at a faster pace than had been expected was the icing on the cake for dollar bulls.

Continued yen falls and higher oil prices may even accelerate inflation near 2 percent faster than expected, making it more likely the BOJ could raise its yield target late next year, some analysts say.

“If the yen declines to 120-125 per dollar and oil prices continue to rebound, that would make it more likely for consumer inflation to reach 1.5 percent,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management. “If the BOJ began to forecast that, that would be a good reason to change monetary policy.”


As rising U.S. Treasury yields push up Japanese long-term rates, the BOJ is more open to discussing the idea of raising its 10-year yield target as early as next year, sources have told Reuters.

The 10-year bond yield hit a nearly one-year high of 0.1 percent on Friday, testing the BOJ’s resolve to guide the yield around zero, and keeping central bank bureaucrats busy trying to contain further gains by buying bonds.

But BOJ officials say the benefits of their yield curve control (YCC) are well worth the trouble, alluding to the role it has played in accelerating the yen’s declines.

The dollar’s surge to a 10-month high of 118.66 yen is mainly on the back of the prospect of steady U.S. rate hikes and Trump’s likely inflation-stoking policies. But YCC also played its part in accelerating the yen falls by widening U.S.-Japanese interest rate differentials, people say.

The BOJ based its quarterly inflation estimates, released on Nov. 1, on the assumption that a 10 percent yen decline would push up inflation by around 0.3 percentage point in a year.

With the yen having fallen 10 percent since then, the BOJ’s inflation estimate for fiscal 2017 could theoretically be raised to 1.8 percent from last month’s estimate of 1.5 percent.

Any such upward revision, and rising global bond yields, may help the BOJ argue that a modest rise in the 10-year yield target wouldn’t hurt, some analysts say.


But it’s not certain just how much a weak yen boosts Japan’s economy.

Exports rose only 9 percent in the two years after Prime Minister Shinzo Abe launched his “Abenomics” stimulus programmes in 2013, even though the yen fell more than 60 percent against the dollar. Overseas shipments then lost momentum on soft demand from Asia’s emerging economies.

The benefits that a weak yen has brought through inbound tourism may also be fading as spending by tourists visiting Japan fell for the first time in almost five years in July-September.

And a weak yen is not without costs, such as cooling consumer spending by driving up grocery and raw material costs.

BOJ Governor Haruhiko Kuroda warned of the potential hit to households when the dollar rose to around 125 yen in mid-2015. That has led markets to believe policymakers won’t tolerate a dollar rise above that level - known as the “Kuroda line”.

“There’s no reason for the BOJ to stop the (yen‘s) move that is totally welcome from the standpoint of achieving its price goal,” said Masamichi Adachi, senior economist at JPMorgan Securities Japan.

“In Japan, people are concerned more about a return of a strong yen causing deflation than an excessive yen weakening driving up inflation.”

Additional reporting by Sumio Ito, Stanley White, Tetsushi Kajimoto and Kaori Kaneko; Editing by Ian Geoghegan

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