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Worried by prospects of a pause in the U.S. interest rate hike cycle, the Bank of Japan is shifting focus towards a risk that it may be forced to deploy more stimulus this year to stop sharp yen rises from derailing an economic recovery, sources say.

Just months ago, Japanese central bankers were debating how they could start whittling down a massive monetary stimulus due to concern over prolonging the pain inflicted on financial institutions’ profits by years of near-zero interest rates.

But, the dollar’s flash crash against the yen last week gave Japanese policymakers a sharp reminder how their strategies are shaped in large part by external factors beyond their control, notably what the U.S. Federal Reserve does.

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“It put me on edge as the move was unpredictable and hard to explain,” a senior finance ministry official said of the dollar’s tumble to a 10-month low of 104.96 yen on Jan. 3.

And the yen’s sharp spike became a key talking point for BoJ executives returning from New Year holidays the following day, sources familiar with the central bank’s thinking told Reuters.

Central bankers around the world are wondering how they can change step to reduce disturbance for their economies should the Fed switch away from tightening.

For Japan, the likely consequences would be an unwanted, sustained strengthening in the yen that would hurt exports and further hobble a stubbornly sluggish economy.

Growing fears of a global slowdown have shifted the BoJ’s focus to the risks to Japan’s recovery and on whether maintaining the current stimulus would be enough.

“It’s true the yen will face more upward pressure if the Fed stops hiking rates,” one of the sources said.

“If the economy falters or recession risks heighten, the BoJ would need to act,” the official said, giving a view that was echoed by two other sources.

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Already carrying the high cost of its mega-easing program, the BoJ lacks tools to fight another economic downturn. Governor Haruhiko Kuroda has publicly flagged his readiness to ease if growth sputters. But, the sources said, any such a move would be taken very reluctantly.

“If it turns out the Fed will forgo rate hikes for quite a long time, that would be a headache for the BoJ,” said Shigeto Nagai, a former central bank executive who is now head of Japan economics at Oxford Economics.

Under a policy dubbed yield curve control, the BoJ guides short-term rates at minus 0.1 percent and 10-year yields around zero.

While the main objective of the policy is to keep corporate borrowing costs low, it also helps deter sharp yen gains by keeping U.S.-Japanese interest rate differentials wide. A Fed rate hike pause could narrow the differentials and strengthen the yen against the dollar.

‘CAN STAND PAT FOR NOW’

BoJ policymakers have counted on a steady U.S. rate hike to subdue the yen, and up to now have based their upbeat economic forecasts on the assumption that strong U.S. growth will underpin global demand and Japanese exports.

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That assumption was put in doubt on Friday, when Fed Chairman Jerome Powell said the U.S. central bank was not on a preset path of rate hikes and will be sensitive to downside risks.

While the dollar has rebounded above 108 yen, many investors now bet the Fed will forgo hiking rates this year amid risks of slowing global growth.

The Fed’s dovish tone may help Japan in the short run if it stabilizes markets by easing investors’ worries on U.S. growth, but those benefits could be outweighed if it were to result in sustained strength in the yen.

For now, the BoJ can seek to keep yen rises at bay by allowing 10-year yields to fall below zero. It can do so without cutting rates, due to a decision in July to allow yields to move in a wider band around its zero percent target.

Many analysts see little chance the BoJ will ease at its next rate review on Jan. 22-23, as markets have restored some calm and the economy still far from a recession.

“The BoJ can stand pat now because the economy is still in fairly good shape,” said Sayuri Shirai, a former BoJ board member who retains close contact with incumbent policymakers.

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“But the BoJ will probably do what it can if recession risks heighten, including cutting rates.”

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