Bank of Japan (BOJ) will announce its monetary policy decisions tomorrow sometime in early Asian hours, probably around 3:00 GMT, followed by the press conference from governor Kuroda.
Current monetary policy –
- Early this year Bank of Japan (BOJ) unexpectedly reduced rates to -0.1% and as of now BOJ is pursuing a tiered system for rates.
- It is also pursuing monetary easing through asset purchase (Govt. Bonds, ETFs, REITs) since 2012 and has increased the pace of purchase to ¥ 80 trillion per annum in October 2014.
- In December 2015, BOJ announced it will be additionally purchasing ¥300 billion in equities and increase the duration of the bond portfolio to 10-12 years.
- This massive rate of purchase has pushed Central bank’s balance sheet to record high which is a major concern in GOJ (Government of Japan) bond market.
Policy expectation and possibilities –
- After last times backfiring of negative rates we expect Bank of Japan (BOJ) to stay away from introducing a further monetary stimulus. However, it is more likely that it will try to talk down the yen.
- Moreover, policymakers will be willing to keep the powder dry and watch out how yen plays out the British referendum today.
Division among policymakers –
- BOJ board remains heavily divided. In last action to reduce rates to negative came with 5 member voting in favor while 4 opposed.
Impact on Yen?
- With severe event risk ahead, Japanese Yen is acting like an insurance. Investors are jumping onto Yen for protection, in case Britain goes for an exit from European Union. At this point any easing will not work to weaken Yen and not at all if Britain votes to leave. Temporary weakness in yen post policy action will be used by traders for new long positions.
- In the event BOJ doesn’t act, Yen is likely to continue gradual strengthening, heading towards referendum.
- Several key concerns for BOJ – Weakness in Emerging market, weak recovery in Japan, China’s slowdown, and British referendum.
Yen is currently trading at 106.3 per dollar and Nikkei at 15960.