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BOJ Said to Be Still Assessing Impact of Stronger Yen

Governor Of The Bank Of Japan Masaaki Shirakawa
The yen traded at 85.32 per dollar at 2:12 p.m. in Tokyo from 85.39 late yesterday. Photographer: Tomohiro Ohsumi/Bloomberg

The Bank of Japan is still assessing the economic effect of the yen’s rise to a 15-year high, according to three people familiar with the matter, an indication it has no immediate plans to ease monetary policy.

Data released since the central bank kept policy unchanged on Aug. 9-10 don’t suggest that economic conditions have suddenly deteriorated, one of the people said on condition of anonymity. Figures this week showed economic growth slowed in the second quarter.

Japan’s 10-year bonds extended weekly gains on speculation the central bank may take steps to support the economy before its next policy meeting scheduled for Sept. 6-7. Policy makers are facing pressure to safeguard the recovery as the yen’s climb threatens to erode exporters’ earnings and deepen deflation.

“If the yen becomes considerably volatile or breaks 80, chances for an emergency meeting would become high,” said Hideo Kumano, a former BOJ official who is now chief economist at the Dai-Ichi Life Research Institute in Tokyo. “The impact of further accommodative steps may be limited; it would mainly be aimed at preventing the yen from becoming excessively strong.”

The yen traded at 85.32 per dollar at 2:12 p.m. in Tokyo from 85.39 late yesterday. It reached 84.73 against the dollar on Aug. 11, the highest level since 1995. The Nikkei 225 Stock Average dropped 1.8 percent, snapping two days of gains. Ten-year bond yields fell two basis points to 0.91 percent today and haven’t completed a weekly advance since July 9.

Revised GDP

One of the people said the BOJ may need to examine the revised gross domestic product report due Sept. 10 to gauge the strength of the economy. The next board meeting is scheduled for Sept. 6-7. Another person said the bank would be prepared to hold an emergency meeting should currency or financial-market volatility spur concern the moves might affect the economy.

Finance Minister Yoshihiko Noda said today that he’s watching currency markets “with great interest” and he will continue to work closely with the central bank on economic matters. He said he will meet with Prime Minister Naoto Kan next week to discuss the economy and currency.

Kan asked ministers to come up with fresh proposals to support the economy this week after a report showed growth slowed to an annualized 0.4 percent in April-June, the weakest pace in three quarters. Economy Minister Satoshi Arai met with Kan today and said no specific initiatives were discussed.

Kumano at Dai-Ichi Life said the central bank may expand its 20 trillion yen ($230 billion) lending facility if it decides to take action.

Credit Program

The central bank may increase the credit program to 30 trillion yen to lower short-term interest rates and weaken the currency, the Sankei newspaper reported yesterday, without saying where it got the information. The loan period may also be increased to six months from three months, possibly at an emergency meeting before Kan meets BOJ Governor Masaaki Shirakawa next week, the report said.

One of the people indicated that holding an emergency meeting wouldn’t be as effective as it was in December, when the yen’s surge to the highest level since 1995 caused business sentiment to worsen rapidly and investors were concerned about the risk of another recession. The central bank introduced its bank-loan program at the unscheduled December gathering.

The yen will weaken temporarily should the central bank expand its credit program, as it did when the facility was introduced in December, said Takuji Aida, senior Japan economist at UBS AG in Tokyo.

Serve as Bridge

“It would be difficult to push the yen in one direction for a long period of time just with the supply of liquidity,” Aida said. “But we think the U.S. economy will eventually come back, so the Bank of Japan’s actions would serve as a bridge until then.”

Vice Finance Minister Naoki Minezaki said yesterday that “there is no doubt that a strong yen is having a very severe impact on exporters.” He said he was concerned about countries holding down the value of their currencies to shield exporters.

Policy makers in the U.S. and Europe appear to be trying to enhance the competitiveness of their exporters and bolster growth, Minezaki said. He also said that while he wants the central bank to support the economy, “Japan’s troubles aren’t the type of things that can be solved with more liquidity.”

Trade Minister Masayuki Naoshima said yesterday that the yen needs to drop about 6 percent to help exporters. “The corporate world is assuming a currency rate of about 90 yen and it’s now around 85, so it’s about five yen too strong.”

The probability that the Finance Ministry will intervene in currency markets for the first time since March 2004 is at a six-year high of 51 percent, according to a Morgan Stanley model.

The yen’s rise and its misalignment from economic fundamentals is increasingly likely to spur a government response, Stephen Hull, London-based head of global currency strategy at Morgan Stanley, wrote in a note dated yesterday.

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