The Bank of Japan (BOJ) will consider easing monetary policy further, possibly at an emergency meeting before next month’s rate review, if further rises in the yen push down Tokyo stock prices enough to hit business sentiment, sources say.
The government could also intervene unilaterally again in the currency market to weaken the yen, although analysts doubt whether such moves would alter a broad weak US dollar trend.
The central bank loosened policy just two weeks ago to ease the pain on the export-reliant economy from the strength of the yen and has expressed its readiness to act again if the prospects of a moderate economic recovery come under threat.
With the yen having risen to a fresh record-high against the US dollar on Friday, bank officials will scrutinize Asian market moves today and debate whether the potential harm from recent yen gains warrants further policy action.
The bank’s next regular rate review will be held on Sept. 6 and Sept. 7.
However, the chance of it easing its already super-loose policy before that cannot be ruled out depending on market developments, sources familiar with the bank’s thinking say.
“We will act swiftly, if needed, with an eye on economic conditions,” one of the sources said.
A brief yen spike to a new record alone will not trigger immediate action.
For the bank to call an emergency policy meeting, it would take a sustained rise in the yen to more than ￥76 to the US dollar, accompanied by falls in Tokyo stock prices that are sharp enough to hurt -business confidence, the sources said.
“The BOJ doesn’t target currency rates, but deals with the effect of exchange rate moves. The trigger for monetary easing would be a severe deterioration in sentiment,” another source said.
Both sources spoke on condition of anonymity due to the sensitivity of the matter.
If the bank was to ease policy, the most likely option would be to expand its ￥50 trillion (US$656 billion) pool of funds to buy government and private assets and offer cheap fixed-rate funds via market operations. The pool was expanded when the BOJ eased policy earlier this month.
Tokyo intervened unilaterally in the currency market and eased monetary policy on Aug. 4, but that did not stop investors from using the yen as a safe-haven against risk, with the US dollar hitting a record low of ￥75.95 on Friday. It later bounced back above ￥76.
Some in the government and the central bank are cautious about using their depleted policy options now, given a host of events that could easily wipe out the impact of their measures.
Among them is US Federal Reserve Chairman Ben Bernanke’s speech on Friday at Jackson Hole, where he could signal further monetary stimulus, and US payrolls data on Sept. 2.
However, the government cannot afford to do nothing, mainly for domestic reasons. Many Japanese exporters say current yen rises are beyond what they can take and could shift production overseas.
The government plans to come up with a package of steps to ease the pain in a third extra budget, such as offering cheap loans to small firms hit by the yen’s rise.
However, progress could be slow as ruling party lawmakers are maneuvering to select a successor to unpopular Japanese Prime Minister Naoto Kan, who is expected to step down as early as the end of this month.
With at least seven ruling party lawmakers — including Japanese Finance Minister Yoshihiko Noda — eyeing the nation’s top job, who will take the helm is unclear, as is how the next leader will ease the pain caused by the yen’s rise.
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