TOKYO -- The Bank of Japan may consider taking additional easing steps to prevent the economy from worsening if the yen rises to around 85 to the U.S. dollar and stays there for a month or two, a person familiar with BOJ thinking said.
In recent weeks, with Europe's sovereign-debt troubles still unsettling financial markets and concern growing that the global recovery is stalling, the yen has gained from about 89 against the dollar. On Friday the dollar briefly dropped to a seven-month low of 86.27 yen, and stayed around 86.65 yen on Monday.
The BOJ's view is that as long as the yen doesn't rise much from its current levels, Japan's economy should remain on the recovery track, a person familiar with the central bank's thinking said.
"But if the yen comes to stay around 85 against the dollar for one or two months, that could have an adverse effect on the economy," said the person. If that happens, the BOJ "may do something."
Financial market participants speculate that the BOJ may act whenever the yen rises strongly, but the central bank hasn't indicated a clear level at which it starts considering action. This is the first time persons familiar with the BOJ's strategy have suggested a concrete level, which could become a guideline for anticipating future monetary-policy changes in Japan.
Just what the BOJ might do isn't clear. Japanese authorities have stayed out of the currency market since March 2004, and few observers expect intervention now.
But the BOJ could provide the financial sector with extra funds by boosting the amount of Japanese government bonds it buys, increasing the amount of low-interest loans to the money market or lengthening the duration of such loans, BOJ watchers said.
"Recently, the yen has been on an upward trend again as the dollar and the euro are being sold due to growing fears about the outlook for the U.S. and European economies," the person said. "If the yen keeps rising, BOJ officials may become more concerned over whether exports will really continue to grow and prop up the economy."
There is precedent for a surging yen to prompt BOJ action. On Nov. 27, when the dollar fell to a 14-year low of 84.82 yen, the BOJ conducted a rate check, which involves asking commercial banks for details of their currency-transaction plans. The practice is seen by currency players as a form of verbal intervention, and is sometimes followed up by actual foreign-exchange buying.
Just four days later the BOJ held an emergency meeting and announced a new 10 trillion yen loan facility to increase market liquidity. The bank's willingness to act briefly helped push the dollar back to about 91 yen -- and suggested that 85 yen was a key level for monetary policy action.
The renewed yen strength comes at a bad time for Japan's economy, which is struggling to solidify its recovery and claw its way out of persistent deflation.
A stronger yen generally hurts exports, which account for around 15% of Japan's gross domestic product. A weaker dollar makes Japanese products more expensive in the U.S., stifling demand, and reduces the value of Japanese companies' sales revenue in yen terms.
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