FX COLUMN-Crimea tensions might deliver weaker yen

Thu Mar 20, 2014 10:17am EDT

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-- Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own --

By Neal Kimberley

LONDON, March 20 (Reuters)- Policymakers struggling to spark inflation in Japan's underperforming economy probably didn't have Crimea on their list of problems.

But some leading financial figures are raising the idea that a prolonged crisis in the Ukrainian region annexed by Russia might counter-intuitively result in a lower oil price that would produce an unwelcome disinflationary impulse in Japan.

That in turn might mean more of the monetary policy innovation in Japan that has already seen a complementary slide in the value of the yen will be necessary in its new financial year that begins on April 1.

It goes like this: Opponents of Russia's actions in Crimea might try to drive the price of oil lower to pressure a Russian economy heavily dependent on energy exports.

For Japan, a counterbalance to a lower oil price would be the adoption of more BOJ policies that had a negative effect on the yen's value, thereby eroding the disinflationary impact of any fall in dollar-priced energy imports in local currency terms.

The yen's importance in Japan's struggle to generate price inflation cannot be overestimated.

BOJ board member Takahide Kiuchi might be a pessimist on the Japanese economy but his remarks on Wednesday were enlightening.

"I personally take the view, however, that rises in the inflation rate to date have been caused mainly by changes in the foreign exchange rates," Kiuchi said.

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Few foreign exchange traders would disagree with that conclusion. But it is a candid admission from a Japanese policymaker and it also begs the question of whether or not Tokyo might see a further slide in the yen's value as desirable.

CRUDE

Oil may hold the key.

The U.S. decision to hold a test sale of 5 million barrels of sour crude, announced on March 12, was seen by some as a subtle message to Russia, driving down oil prices to their lowest in a month on that day.

The price of a barrel of Brent crude had fallen to below $106 on Thursday from $112.39 on March 3, despite the geopolitical tension arising from the crisis in Ukraine.

Saudi Arabia, whose own oil output rose 90,000 barrels per day to 9.85 million bpd in February, might not necessarily object to a temporary fall in the price of crude.

While having no material interest in Crimea itself, Saudi Arabia does find itself at odds with Russia over Syria.

Russia has been supportive of the current Syrian government in Damascus, while Saudi Arabia has backed Sunni rebels opposing Syrian President Bashar al-Assad's forces.

But the possibility of a lower oil price would not fit well with Japan's efforts to generate inflation, bringing the argument full circle to Kiuchi's comments about the yen's slide.

The BOJ will not hesitate to adjust policy to meet its inflation target if risks to its forecasts appear, Governor Haruhiko Kuroda said on Thursday.

That could all add up to a weaker yen. (Editing by Hugh Lawson)

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