BOJ to sit tight and hold policy steady

Bank of Japan (BOJ) will announce its monetary policy decisions tomorrow sometime in early Asian hours. Speech by Governor Kuroda is scheduled at 3:00 GMT.

Current monetary policy -

• BOJ is holding policy rates near zero at 0.1% and 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 last October.

• This massive rate of purchase has pushed Central bank's balance sheet to record high. As of latest now balance sheet size of BOJ stands at ¥ 332 trillion.

Policy expectation -

• BOJ policymakers are most likely to hold policy steady.

Why it is likely to hold policy steady?

Liquidity -

• Current pace of purchase has already reduced the liquidity in the world's second largest bond market.
  
  
• Bank of Japan's purchase is already crowding out the market. In some series BOJ has gobbled 70-80% of the issuance.

• At current rate of purchase, by 2016 BOJ will hold 40% of Japanese debt.

Division among policymakers -

• BOJ board remains heavily divided. Last action came with 5 member voting in favor while 4 opposed further purchase increase in October 2014.

• BOJ policymakers Mr. Kiuchi has voted in favor of reducing purchase in March meeting and according to Mr. Ishida purchase pace stands at max.

Impact on Yen?

• Not much impact on Yen, as policy is already factored in price. However holding it steady might push Yen higher by few pips and sellers are expected to emerge there.

• Yen is most likely to continue its downward path against dollar. Yen is currently trading at 121 against dollar and most likely to lose further grounds.

• Focus will be on speech from Governor Kuroda at 3:00 GMT