Analyzing BOJ To Keep Rates Low As Strong, Not Weak, Yen Still Kuroda’s No. 1 Enemy By Reuters

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© . A Japanese yen note can be seen in this illustration photo, taken on June 1, 2017. REUTERS/Thomas White/Illustration

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TOKYO () – Haruhiko Kuroda built a career battling a strong yen and the Bank of Japan governor is unlikely to change course in his final year at the helm, eight sources said, despite political pressure to recognize that the weak currency is now a problem. Sources familiar with the bank’s thinking and those close to Kuroda, whose decade in leadership ends in April, said he is likely to protect his legacy by avoiding adjustments to monetary policy that could threaten a strong yen as enemy No. 1. continues to treat. dovish signals could give markets a chance to lower the yen further, as prospects of a steady Federal Reserve tightening policy widen the interest rate differential between Japan and the US. “The BOJ looks at inflation, not movements in the yen, when it guides policy,” one of the sources said. Kuroda’s career as a financial bureaucrat was marked by warring yen gains that threatened Japan’s export-dependent economy. After landing the top job of the BOJ in 2013, he maintained that stance and caused the yen to fall dramatically by introducing massive monetary stimulus, a policy considered one of the key successes of the growth-promoting” Abenomics” by former Prime Minister Shinzo Abe. Now, Kuroda is increasingly alone in repeating the benefits of a weak currency as government officials raise their warnings against excessive declines in the yen that will help drive up import costs and consumer prices for energy and food. The weak yen has become a political hot button as lawmakers demand measures to cushion the blow of rising inflation ahead of July’s upper house elections. The mood is also beginning to change at companies. Kengo Sakurada, head of corporate lobby Keizai Doyukai, said on Tuesday that current yen levels are hurting retailers and “can hardly be considered appropriate”. Even former Finance Ministry colleagues, most of whom struggled like Kuroda to counter a strong yen, are beginning to brand the currency’s weakness as an indication of Japan’s waning economic power. Kuroda appears unfazed and continues to argue that while a weak yen could hurt households and retailers, the benefits to the economy outweigh the costs. The BOJ is still relentless in defending its 0% cap on long-term interest rates, set as part of its ultra-easy policy. Undeterred by the yen’s decline to its six-year low against the dollar on Monday, it offered unlimited, fixed-rate purchases of 10-year Treasuries through Thursday and accelerated bond buying for other maturities. “In a sense, the BOJ is driving the yen down by buying unlimited bonds,” said former top currency diplomat Naoyuki Shinohara, who was Kuroda’s colleague at the Treasury Department. “It probably doesn’t see the yen’s current levels as dangerous.” UNWARMING AND PRAGMATIC So far within the BOJ there has been little dissatisfaction with Kuroda’s position. Dovish board members, such as Goushi Kataoka, see the weak yen as an important channel through which the bank’s easygoing policies are driving growth. A summary of views from a March meeting made no mention of the pros and cons of a weak yen. Prime Minister Fumio Kishida’s government, meanwhile, continues to champion the BOJ’s ultra-easy policies as necessary support for a still fragile economic recovery. “It is difficult to tighten monetary policy to face cost inflation, which means monetary policy must remain loose,” said Deputy Cabinet Secretary Seiji Kihara, who is considered one of the prime minister’s closest associates. Pressure to adjust the yield cap could become overwhelming as the yen, now hovering near 122 versus the dollar, falls to around 130, some analysts say. But Eisuke Sakakibara, known as “Mr. Yen” for his masterful currency interventions in the 1990s, argues that raising BOJ interest rates will do little to stop the yen’s decline. For now, Kuroda is expected to ensure that the BOJ continues to follow the course of an ultra-easy policy. While political pressure may mount on him to give in, the current law does not give the government the power to fire the central bank governor. Kuroda is unlikely to be reappointed as he has already served an unusually long term. Kuroda’s predecessor, Masaaki Shirakawa, voluntarily resigned several weeks before the end of his term after he faced a barrage of criticism for doing too little, too late, to beat deflation. Resigning early or raising interest rates under political pressure is not in Kuroda’s nature, say people in regular contact with the governor. “He may be in heat, but he probably doesn’t care,” said one of the people. “He is extremely pragmatic and steadfast, so I don’t see why he would choose to step down or change policy now.”

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