The Bank of Japan rate decision on Friday plays second fiddle to the likelihood of currency intervention but the announcement and ensuing commentary could play an important role in the immediate direction of the Yen.
It is widely predicted that the BoJ’s Monetary Policy Committee will keep all policy measures unchanged within a range of 0.00%-0.10%, following last month’s first rate hike in 17 years. However, a minority of analysts cautioned that given the recent weakening of the Yen, rate setters may decide further action is required.
SocGen’s Kunal Kundu said, “After the March meeting, despite the BoJ’s rate hike, the USD/JPY became weaker. The market may have interpreted the BoJ’s decision to maintain monthly Japanese Government Bond purchases as a dovish stance. It is therefore possible that the BoJ may reduce its monthly JGB purchases if it wants to correct the recent depreciation of the yen.”
Nonetheless, the central bank currently plans to continue its JGB buys and analysts reasoned that at least for April, the chance of a reduction in the purchases was slim.
Experts highlighted recent comments from the central bank’s Chairman and Governor, Kazuo Ueda. Speaking at the PIIE seminar he said the BoJ would "initially be assessing the impact of the recent [policy] changes on the economy and inflation, and then consider further adjustments as deemed appropriate."
BofA economists expect the governor to largely repeat recent comments, including in his latest Asahi Shimbun interview (published 5 April). In it he said that the central bank made the decision to end NIRP because the "degree of certainty" in achieving the 2% price stability target "had exceeded a certain level." Adding that further increases in the "certainty" would be a reason for raising the policy rate further.
With borrowing levels pushed to one side for this meeting, the focus will turn toward the Outlook Report and governor press conference.
Updated Outlook Report
As well as the decision, an updated Outlook for Economic Activity and Prices is set to be released. SocGen’s Kundu posited that “Given that crude oil prices, yen weakness and the results of the spring wage negotiations have all proved more inflationary than BoJ anticipated in its January Outlook Report, we expect the bank’s core CPI forecasts (excluding only fresh food) for FY24 to increase from 2.4% in January to 2.7%.”
BofA has also revised its own forecasts for FY24-25 inflation higher, noting elevated projections for both oil and the USD/JPY. “Our own view is that the BoJ is unlikely to bring up hikes solely for the purpose of influencing the exchange rate, especially in the near term. However, the re-acceleration of imported inflation, driven by higher commodities and prolonged yen weakness, raises the likelihood that underlying inflation will continue to rise toward the central bank's 2% target,” the bank’s Japan analysts wrote.
It should be noted that market participants will get the latest regional inflation update with the release of the April CPI report. Economists forecast inflation in the capital slowed to 2.2% in April from 2.4% in March.
Morgan Stanley MUFG Securities warned that a potential ‘knee-jerk’ reaction to the data could further weaken the currency. “We think there is risk of a substantial decline in April Tokyo CPI due to a special factor of the effective elimination of high school tuition in Tokyo, depending on the decision by the statistical bureau.”
A ministry official told news agencies that officials were still considering how to reflect the impact of free high school tuition in the data.
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- Policy seen on hold in 0.00%-0.10% range
- Potential tweaking of JGB buys on the table
- Updated Outlook Report could hint at next move
- Decision due Friday 02:30 - 04:30 GMT
By Harry Daniels
LiveSquawk News
@HarryDaniels71
25 April 2024 | 10:30 GMT
The Bank of Japan rate decision on Friday plays second fiddle to the likelihood of currency intervention but the announcement and ensuing commentary could play an important role in the immediate direction of the Yen.
It is widely predicted that the BoJ’s Monetary Policy Committee will keep all policy measures unchanged within a range of 0.00%-0.10%, following last month’s first rate hike in 17 years. However, a minority of analysts cautioned that given the recent weakening of the Yen, rate setters may decide further action is required.
SocGen’s Kunal Kundu said, “After the March meeting, despite the BoJ’s rate hike, the USD/JPY became weaker. The market may have interpreted the BoJ’s decision to maintain monthly Japanese Government Bond purchases as a dovish stance. It is therefore possible that the BoJ may reduce its monthly JGB purchases if it wants to correct the recent depreciation of the yen.”
Nonetheless, the central bank currently plans to continue its JGB buys and analysts reasoned that at least for April, the chance of a reduction in the purchases was slim.
Experts highlighted recent comments from the central bank’s Chairman and Governor, Kazuo Ueda. Speaking at the PIIE seminar he said the BoJ would "initially be assessing the impact of the recent [policy] changes on the economy and inflation, and then consider further adjustments as deemed appropriate."
BofA economists expect the governor to largely repeat recent comments, including in his latest Asahi Shimbun interview (published 5 April). In it he said that the central bank made the decision to end NIRP because the "degree of certainty" in achieving the 2% price stability target "had exceeded a certain level." Adding that further increases in the "certainty" would be a reason for raising the policy rate further.
With borrowing levels pushed to one side for this meeting, the focus will turn toward the Outlook Report and governor press conference.
As well as the decision, an updated Outlook for Economic Activity and Prices is set to be released. SocGen’s Kundu posited that “Given that crude oil prices, yen weakness and the results of the spring wage negotiations have all proved more inflationary than BoJ anticipated in its January Outlook Report, we expect the bank’s core CPI forecasts (excluding only fresh food) for FY24 to increase from 2.4% in January to 2.7%.”
BofA has also revised its own forecasts for FY24-25 inflation higher, noting elevated projections for both oil and the USD/JPY. “Our own view is that the BoJ is unlikely to bring up hikes solely for the purpose of influencing the exchange rate, especially in the near term. However, the re-acceleration of imported inflation, driven by higher commodities and prolonged yen weakness, raises the likelihood that underlying inflation will continue to rise toward the central bank's 2% target,” the bank’s Japan analysts wrote.
It should be noted that market participants will get the latest regional inflation update with the release of the April CPI report. Economists forecast inflation in the capital slowed to 2.2% in April from 2.4% in March.
Morgan Stanley MUFG Securities warned that a potential ‘knee-jerk’ reaction to the data could further weaken the currency. “We think there is risk of a substantial decline in April Tokyo CPI due to a special factor of the effective elimination of high school tuition in Tokyo, depending on the decision by the statistical bureau.”
A ministry official told news agencies that officials were still considering how to reflect the impact of free high school tuition in the data.