BOJ monetary policy preview

Bank of Japan (BOJ) will announce its monetary policy decisions today sometime in early Asian hours, probably around 2:00 GMT, followed by a press conference from Governor Kuroda around 6:30 GMT.

Current monetary policy –

• Last major action from Bank of Japan (BOJ) was in 2016 when it unexpectedly reduced rates to -0.1% and as of today, 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.

• In September 2016, the Bank of Japan (BoJ) introduced yield curve control, which essentially says that the central bank would control the short term rates via interest rates and long term rates via control of the 10-year yield, which would be done by purchase and reverse purchase of bonds. As of now, the targeted yield for the 10-year bond is close to zero.

• In 2018, the BoJ has been very active in the sovereign bond market and defended the YCC using special auctions.

Policy expectation and possibilities –

• Governor Kuroda has pledged to continue the easing unless inflation target of 2 percent is achieved.
• So, it is unlikely that the central bank would make any changes to its monetary policy at tomorrow’s meeting.

Division among policymakers –

• BOJ board remains heavily divided. The last action was done with 6 members voting in favor while 3 opposed.

Impact on Yen?

• Without any action from the BoJ, the yen is likely to ignore tomorrow’s monetary policy meeting, instead, the focus would remain on the dollar, the yield spread, and any risk aversion in the market.
   
• It is important to note that another trade has been re-emerging in recent months; that is monetary policy divergence. If tomorrow, BoJ stands pat on policy and gives out no clear hawkish indication, the yen is likely to weaken against its major trading counterparts if there are no risk aversions in the market.

• Several key concerns for BOJ – Protectionist policies in the US, weakness in some emerging markets such as Turkey and China, and rising energy prices.

Yen is currently trading at 108.8 per dollar and Nikkei at 21760.