By Leika Kihara and Takahiko Wada

TOKYO, Reuters – A stronger yen and more firmly rooted inflation expectations will be more influential than a weak yen in future adjustments to the Bank of Japan’s huge stimulus program and dovish guidance. Three sources with knowledge of its thinking state that.

The divergence between the U.S. Federal Reserve pushing for large rate increases and Japan’s central banks that have kept interest rates low to support the economy has led to the yen falling to an almost 130-year-old low against the dollar.

Haruhikokuroda, BOJ governor Haruhiko Kuroda and the finance minister have issued verbal warnings about the BOJ’s sharp currency moves. They claim that these could prove more harmful to the economy than beneficial for exports.

According to the markets, the BOJ might adjust its current guidance to preserve interest rates “at or below their present levels” to create a neutral policy to limit further weakness in the Japanese yen.

The BOJ may make adjustments to its guidance, but it is unlikely that the central bank will do so quickly with an economy still recovering to pre-pandemic levels. Sources said.

According to them, the BOJ does not intend to use monetary policies tools to stop yen falls directly. A move like that would be considered currency manipulation.

Sources said, “Raising rates and signalling that such action is being taken now will damage the economy.” One source claimed that “Yen moves do not constitute direct targets of monetary policies,” which is also supported by the two sources.

They stated that the BOJ would only reconsider its dovish guidance if there are other factors driving up inflation, such as a fall in the yen, which they believe will keep inflation at 2%.

According to third sources, “if inflation persists and causes a shift in long term inflation expectations, then there may be room” for an adjustment to BOJ’s stimulative policy.

WAGE AND INFLATION EXPECTATIONS KNOWN KEY

While other central banks may have begun to tighten their monetary setting, the BOJ promised to keep its ultra-loose policy. It argued that Japan’s sticky deflationary mentality will stop prices rising soon.

In a third attempt to protect its yield target, the BOJ bought unlimited 10-year bonds of government at 0.2%, underscoring its determination to maintain rates low.

After two decades of deflation, Japan’s consumer inflation has accelerated only slightly. In February, core consumer prices increased by 0.6% compared to the BOJ’s target of 2.2%.

There are some signs that inflation expectations for the short term are rising. According to the BOJ’s March quarterly survey, firms expected inflation to reach 1.8% in a year, which is the most recent record. Meanwhile, an index that gauges big manufacturer output prices rose 40 years ago to its highest level.

Unrelated research showed that the proportion of households anticipating prices rising in the coming year hit a high point of 14 years.

Naomi Muguruma, an experienced BOJ watcher predicted that central banks could take a more hawkish stance to their policy guidance during its April 27-28 meeting.

Due to rising fuel costs, dissipating impact of the past phone fee reductions and increasing consumer inflation expected to accelerate to around 2.5% from April, BOJ will likely raise its price forecast for next week.

Sources said that when and if the BOJ changes its guidance, it will be dependent on whether inflation remains at around 2% for as long as wages and consumption recover strongly enough to place the economy on an economically sustainable recovery track.

Analysts stated that the new quarterly projections released by the central bank at its April 27-28 policy conference will give clues about how it sees the chances of an uptake in inflation expectations.