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The Bank of Japan (BOJ) is planning contingency measures to absorb a potential shock from an unexpected US Federal Reserve’s (Fed) policy action this week should the Fed seek to support stock prices, MNI reports, citing some officials from Japan’s central bank.

Additional takeaways

“The officials concede this isn’t likely given that other financial markets remain stable.”

“The BOJ will need to arrange for measures at its policy meeting ending Thursday in order to prepare against a surprise move to support stock prices at the Fed’s meeting which finishes on Wednesday.”                               

“The BOJ pays close attention to the dollar/yen rate, and the bank wants to avoid a sharp rise in the yen as a result of a market view that it is lagging the Fed.”

“BOJ officials feel the Fed may tweak its forward guidance following the decision to allow inflation to modestly overshoot 2%, in order to compensate for below-target periods of price rises.“

“However, they don’t expect the Fed to introduce “outcome-based forward guidance” this week despite heightened uncertainties over the US economic outlook. “

“BOJ officials are focused on whether the Fed’s 2023 inflation rate forecast stays below 2%, compared with 1.7% in 2022, and its impact on markets. A forecast below 2% will strengthen an extended period of Fed’s easing.”

Market reaction

Torn between broad dollar weakness and risk-on market mood, USD/JPY keeps its range play intact around 105.65, modestly flat on the day.