• Central bankers are worried it will hurt their inflation goal
  • Currency has rallied this year, reversing its previous trend

Bank of Japan Governor Haruhiko Kuroda’s concerns about a rising yen are shared by senior officials at the central bank, according to people familiar with the discussions.

Worries about the potential impact on inflation from a strengthening exchange rate are escalating at the BOJ ahead of an April 28 policy decision, according to the people, who asked not to be named as the talks are private. Kuroda said in an interview with the Wall Street Journal last week that if excessive appreciation continued it could affect consumer price gains and business confidence.

The shared concerns underscore the importance of the yen in the BOJ’s broader reflation campaign, despite Japan’s pledge as a member of the Group of 20 to avoid any competitive currency devaluations. A correction in a super-strong yen was among the key achievements of Kuroda and Prime Minister Shinzo Abe, and helped stoke record corporate profits and a surge in stocks.

Kuroda emphasized that the yen had not just been gaining against the dollar, but other currencies as well. A look at the effective, or trade-weighted, exchange rate shows why he might be concerned -- Japan is contending with the biggest advance since Abe took office and put Kuroda at the helm of the central bank:

Officials are worried that a stronger currency, by weighing down corporate profits, may in turn reduce growth in investment and wages, weakening the “virtuous cycle” the BOJ is trying to foster.

If the central bank decides to add more stimulus, some officials believe all "three dimensions" are possible, meaning they could change the quantity and quality of assets purchased, as well as adjust the negative interest rate, said the people. Despite criticism of the negative rate by investors, officials remain confident of its effectiveness.

With just over a week to go until the policy board makes its decision, some officials believe a decision on more stimulus will be a close call, while others think the BOJ can wait longer to gauge the effect of negative rates.

Data Deluge

In addition to carefully watching markets over the next week, the board will also scrutinize data on inflation, employment, industrial production and retail sales that will be released as they meet.

The yen’s rise tops the list of things that have changed since the BOJ kept policy unchanged at its meeting March 15, Takeshi Yamaguchi, an economist at Morgan Stanley MUFG Securities wrote in an April 20 note. He also highlighted the recent earthquakes in southern Japan, diminishing inflation expectations and "lackluster" annual wage talks.

Taken together, the changes will probably spur the bank to lower its projections for growth and inflation at next week’s gathering, Yamaguchi wrote. Any policy inaction would risk yet further yen appreciation, he said. "We think the BOJ recognizes such a risk, likely announcing additional easing at the April" meeting, Yamaguchi wrote.

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