Bank Of Japan To Remain Steadfast Despite Pressure On Yen

- Policymakers likely to maintain ultra-low interest rate
- No major change expected to dovish guidance
- Focus on Kuroda's comments on weak yen, inflation
- Decision set for release Thursday at 03:00-05:00 GMT
- Kuroda press conference expected at 06:30 GMT

 

Peter Devlin
LiveSquawk News
@dev_peter

 

21 September 2022 | 13:30 GMT

 

The Bank of Japan is set to reinforce its outlier status on Thursday by maintaining its ultra-low interest rates and dovish policy guidance.

 

Economists expect the BoJ to leave its policy settings unchanged, with its policy-balance rate at -0.1% and the 10-year Japanese government bond yield target at "around" 0.0% under yield curve control.

 

Amid facing pressure from the country’s finance ministry to curb the yen freefall, the Japanese central bank is set to hold on to the world’s only negative policy rate in the face of muted inflation. Swiss central bankers are expected to ditch negative rates Thursday.

 

Bjorn Sillemann, senior analyst at Danske Bank, said the BoJ will stay put at Thursday’s meeting. “Any near-term changes to FX intervention and/or the YCC will have to be forced upon BoJ from the outside.”

 

Lasting Price Pressures 

 

Japan's core consumer inflation quickened to 2.8% in August, hitting its fastest annual pace in nearly eight years and exceeding the central bank's 2% target for a fifth straight month as price pressure from raw materials and yen weakness broadened.

 

Despite growing suspicions that cost will rise longer than the BoJ projects, Darren Tay, economist at Capital Economics, said he expects no tightening. “The Bank’s underlying measures of inflation, particularly mode inflation, which measures the most common instance of price increase in the inflation basket, is unlikely to have increased to a level that would warrant a rate hike.” 

 

Japan's economy grew more than initially reported in the second quarter as the lifting of local Covid-19 restrictions boosted consumer and business spending, though activity remained shy of its pre-pandemic peak. 

 

“In the absence of consistent demand-side pressures, the BoJ has little motivation to tighten monetary policy,” posited Illiana Jain, an economist at Moody’s Analytics. 

 

End Of Pandemic Funding Programme 

 

While the BoJ is likely to leave its main monetary policy unchanged, it is set to end the pandemic-relief funding scheme as scheduled.

 

The central bank currently links a part of guidance on policy with the pandemic, so an end to the programme suggests a possible change in wording. 

 

Wei Yao, analyst at Societe Generale said the key phrase on rates will stay unchanged for now on an easing bias. “We expect it to maintain its guidance on policy interest rates: The bank also expects short-and long-term policy interest rates to remain at their present or lower levels.” 

 

Risk Of Further Yen Slide 

 

At the accompanying press conference, Governor Haruhiko Kuroda will likely be questioned about the impact of the yen’s recent rapid depreciation and policy responses.

 

Authorities in Tokyo ramped up their warnings against the rapid yen moves after it flirted with 24-year lows against the dollar last week. Japan’s finance minister, Shunichi Suzuki, indicated that direct intervention is among the options on the table and, if needed, it will come swiftly and without warning.

 

Additionally, Japanese financial daily The Nikkei reported last week that the Bank of Japan has conducted a rate check in apparent preparation for currency intervention. Analysts do not expect Kuroda to make any new comments on FX invention at this meeting.

 

Early Wednesday morning, the BoJ announced two unscheduled JGB purchase operations, offering to buy JPY 150bn of 5-10 year JGBs and JPY 100bn of 10-25 year JGBs.

 

The response was muted as the Japanese yen was still trading flat against the greenback around a 24-year historical low. Debate around the BoJ's defence of its YCC policy is expected to intensify with global yields under pressure.

 

Sillemann at Danske Bank warned if the MoF decides to start FX intervention, it opens Pandora’s box in financial markets. “The market will speculate in BoJ abandoning its YCC as it cannot both have low yields and a stronger currency. 

 

“The only thing we are quite certain of is that monetary policy regime changes, such as what could await in Japan, are rarely pretty.”

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