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BOJ does not have a "Kuroda line" to stop yen weakening: sources

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Bank of Japan Governor Haruhiko Kuroda never intended to put a floor under the yen and, like many Japanese policymakers, would prefer to see the currency weaken further rather than bounce up sharply, sources familiar with his thinking say.

[TOKYO] Bank of Japan Governor Haruhiko Kuroda never intended to put a floor under the yen and, like many Japanese policymakers, would prefer to see the currency weaken further rather than bounce up sharply, sources familiar with his thinking say.

Mr Kuroda sparked a yen rally last month when he told parliament the currency's real, effective exchange rate was already "very low" and there was not much room to fall further.

While he later stressed he didn't intend to draw any "line in the sand" for the dollar/yen, the pair has since been capped at 125 yen, around the level when he made the remark.

The BOJ has not publicly commented on what investors began to perceive as the "Kuroda line". But foreign investors who have peppered BOJ officials with queries about it have been told informally that no such line exists.

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People who are close to Mr Kuroda or have knowledge of currency deliberations say the governor had little to gain from setting a floor under the yen. "If you set a floor under the yen, speculators will bet the other way and try to push up the yen. I doubt the BOJ wants that happening," said one official.

Indeed, policymakers, including those in the BOJ, are generally happy with a weaker yen as long as the pace remains moderate, the sources say.

Mr Kuroda's remark came at a time his massive stimulus was drawing heat for spurring what some lawmakers saw as unwelcome yen declines that pushed up import prices and the cost of living, hitting small firms and households.

That led some market players to believe that whether or not Mr Kuroda made the remark intentionally, he may have got what he wanted by nodding to such concerns.

But while the BOJ is sensitive to political concerns over the weak yen, it still sees yen declines as helpful to the economy by giving exports a competitive advantage, current and former central bank and government officials said. "It's true Japanese policymakers feel excessive yen declines are unwelcome. But they also know from experience how damaging a strong yen is to business sentiment," said one of them who retains contact with Mr Kuroda.

When Mr Kuroda previously was Japan's top diplomat on currency affairs, he battled a yen spike that aggravated deflation and nudged the economy into recession. The experience has made him, like many of his predecessors, prioritise keeping sharp yen rises in check.

A weak yen also helps the BOJ, which is trying to hit its ambitious 2 per cent inflation target, by prompting price hikes by food makers who are keen to pass on rising import costs to households.

The BOJ is already taking advantage of a steady rise in food costs to convince households that inflation is picking up. "If the BOJ were to fret about a weak yen, the main reason would be that the more the yen weakens, the bigger a yen rise could be when the market tide shifts," one official said.

REUTERS

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