BOJ confirms easing stance as yen risk rises: decision guide

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(Bloomberg) — The Bank of Japan is expected to keep its key monetary institutions unchanged, even as the yen weakens rapidly to a two-decade-long speculation in the low-fuel market about a possible policy or reporting adjustment.

The central bank will begin a two-day meeting on Wednesday and is poised to maintain its negative interest-rate and asset purchase programs, according to 89% of economists polled by Bloomberg. About 10% of those surveyed expect a shift in forward guidance towards tightening.

BOJ Governor Haruhiko Kuroda is in a tricky position as his commitment to easing has contributed to the rapid weakening of the yen, adding to the misery of households and businesses by exacerbating rising energy prices.

At the same time, any tightening would cool an economy that has not yet returned to pre-Covid levels and damage Kuroda’s credibility as inflation remains well below the stable 2% he seeks.

The BOJ’s communication task will be further complicated by the publication of its quarterly outlook. The report is likely to show forecasted inflation revised to 2%, mainly due to the surge in fuel prices, people familiar with the matter told Bloomberg earlier this month.

The bank will have to make it clear that the updated outlook does not mean it is approaching its price stability target and that cost inflation puts the economy at risk of a slowdown, the people said. Any figure above 1.2% would mean the BOJ predicts the fastest inflation rate in three decades, outside of years of tax hikes.

The new forecasts and policy statement are likely to be released early in the afternoon on Thursday, followed by Kuroda’s press conference at 3:30 p.m.

What Bloomberg Economics Says…

“The Bank of Japan is likely to keep its policy unchanged and push back against market pressures that have tested its determination to keep interest rates in its target range and its stomach for a weaker yen.”

— Yuki Masujima, economist

To read the full report, click here

What to look for

  • Currency traders will be watching closely for any sign of a shift in the assessment of a weak yen. Kuroda has maintained that it is positive for the general economy, while ramping up warnings of abrupt moves as these could magnify the negative effects. A clear deviation from those lines will likely move the currency
  • Some BOJ watchers expect a change in forward guidance currently saying rates will remain at current levels or lower and suggesting an easing bias. Lowering the word or dropping a link to Covid-19 is possible after quasi-pandemic emergency measures were lifted across the country last month, they say
  • The BOJ’s price outlook for next fiscal year will provide an important indication of its view on the sustainability of price growth and thus the prospect of policy normalization. It will be compared to private economists’ outlook that inflation will slow to 0.9%, just half of this year’s expected level
  • The BOJ has shown its determination to stick to yield curve control with unprecedented unrestricted bond purchases. After a wave of global bond sell-offs, traders will check to see if the bank will adjust its check or drop any hint of it, including widening the target band or switching to shorter-term 10-year bonds
  • New economic growth forecasts will provide a clue as to how quickly the bank expects the economy to generate inflationary pressures that would make prices sustainable. BOJ viewers also want to see if board members change their assessment of inflation risks from “overall balanced.”

©2022 Bloomberg LP



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