(Bloomberg) — The Bank of Japan is expected to keep its main monetary settings unchanged, even as the yen’s rapid weakening to a two-decade low fuels market speculation about a possible adjustment to policy or messaging.
The central bank begins a two-day meeting on Wednesday and is poised to maintain its negative interest rate and asset purchase programs, according to 89% of economists surveyed by Bloomberg. About 10% of those polled expect a shift in forward guidance toward a tightening direction.
BOJ Governor Haruhiko Kuroda is in an awkward position given that his commitment to an easing stance has helped fuel the yen’s rapid weakening, adding to households and firms’ woes by exacerbating soaring energy prices.
At the same time, any tightening would cool an economy that’s yet to return to its pre-Covid level and hurt Kuroda’s credibility given inflation remains well short of the stable 2% he is seeking.
The BOJ’s communications task will be further complicated by the release of its quarterly outlook. The report will probably show forecast inflation revised up toward 2%, mainly due to the sharp rise in fuel prices, people familiar with the matter told Bloomberg earlier this month.
The bank will need to make clear the updated outlook doesn’t mean it is approaching its price stability target and that cost-push inflation is putting the economy at risk of a slowdown, the people said. Any figure beyond 1.2% would mean the BOJ is forecasting the fastest inflation in three decades, outside years when there were tax increases.
The new projections and policy statement are likely to be released in the early afternoon Thursday, followed by Kuroda’s press briefing at 3:30 p.m.
What Bloomberg Economics Says…
“The Bank of Japan is likely to keep policy unchanged, pushing back against market pressures that have tested its resolve to keep yields in its target band and its stomach for a weaker yen.”
— Yuki Masujima, economist
To read the full report, click here
What to look for
Currency traders will closely monitor any sign of a shift in the assessment of a weak yen. Kuroda has maintained it is positive for the overall economy, while stepping up warnings about abrupt movements, as these may magnify negative impacts. A clear deviation from those lines is likely to move the currency
Some BOJ watchers expect a change in forward guidance that currently says rates will stay at the current level or lower and suggests an easing bias. Cutting the word lower or dropping a link with Covid-19 is possible after quasi-pandemic emergency measures were lifted across the nation last month, they say
The BOJ’s price outlook for next fiscal year will provide a key indication of its view on the sustainability of price growth and thus the prospect of policy normalization. It will be compared with private economists’ outlook that inflation will slow to 0.9%, just half of this year’s expected level
The BOJ has demonstrated its determination to stick to yield curve control with unprecedented unlimited bond buying operations. Following a wave of global bond selloffs, traders will be monitoring whether the bank will adjust the control or drop any hint of it, including widening the target band or switching to a shorter maturity from 10-year bonds
New economic growth projections will offer a clue on how fast the bank expects the economy to generate inflationary pressures that would make prices sustainable. BOJ watchers are also keen to see if board members alter their assessment of inflation risks from “generally balanced.”
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BOJ to Reaffirm Easing Stance as Yen Risk Mounts: Decision Guide