BoJ July Monetary Policy Meeting Preview

The markets are set for another showdown with the Bank of Japan this week as the central bank meets on July 29, Friday for its monetary policy meeting. The dollar has posted steady gains since the past few weeks led by series of developments, both speculation and facts, all of which stoked investor expectations of more policy easing from the BoJ this week.

With the Brexit referendum now history, markets shifted focus to the upper house elections in Japan which saw Shinzo Abe’s LDP winning with a majority.

The markets viewed this victory as an endorsement for Abenomics. Indeed, right after winning the upper house elections, Abe said, “We have to accelerate Abenomics to meet the public’s expectations.” His comments were important, especially in the context of Abe’s plans to unveil a new fiscal spending program, a view that he mentioned prior to the elections when he postponed the sales tax hike. “I decided that I should delay the sales tax increase because it might damage domestic demand,” Abe said while promising to take “broad, bold” measures in autumn.

In the run-up to this week’s BoJ meeting, officials were also seen stoking expectations. The markets’ bullish view on USDJPY gained strength especially after it was reported that BoJ officials had invited Ben Bernanke for a one-day visit for consultations. While both BoJ officials and Bernanke himself were tight-lipped on the matter, Abe reportedly said, “We are only halfway to the exit from deflation. We want to be steadfast in accelerating our breakaway from deflation.”

Bernanke, who now sits on the Brookings Institution as a Distinguished Fellow is famously known for his views on ‘Helicopter Money’ or a “monetary financed fiscal program” which has given further fodder for the bulls who expect the BoJ to dip into this unconventional QE method. But investor expectations were quickly shot down with BoJ’s Kuroda among other officials ruling out the use of Helicopter Money.

With no clear outlook on what the BoJ might do this week, USDJPY has started to turn flat following last week’s rally to a 6-week high.

Institutional Outlook

JP Morgan – BoJ easing alone won’t help

JP Morgan’s research desk notes that the yen could strengthen against the dollar after the BoJ’s meeting. They said that despite traders expecting no change to policy, USDJPY fell 0.80% and 1.70% in the March and June policy meetings respectively. JP Morgan, however, notes that they expect further rate cuts from the BoJ and increased asset purchases by the central bank this week and note that “yen weakening is unlikely to persist, even assuming an extra easing” in the context that monetary policy action will alone be not enough to pull down the yen. “A mere conventional easing won’t deliver any kind of positive surprise. The USD/JPY thus will likely follow a pattern of buy the rumor, sell the news,” according to JP Morgan.

SMBC Nikko – BoJ and government to coordinate stimulus plans

Analysts at SMBC Nikko, however, expect the BoJ and the government to coordinate their policies. “There are clear signs in the background that the government has called on the BOJ to team up with it. The government has already sent a clear message by indicating it will put together comprehensive, bold fiscal steps by the end of this month, about two weeks ahead of the April-June GDP release on Aug. 15,” Chotaro Morita, chief rate strategist notes.

Citigroup – 55% chance for the BoJ to act

Citigroup, on the other hand, expects the BoJ to take steps in September. “Bank of Japan Governor Haruhiko Kuroda should maximize market expectations for potentially strong steps towards its next policy meeting in September,” says Osamu Takashima, chief FX strategist at Citigroup Global Markets Japan. “The USD/JPY, now at 106.43, may fall to 103-105 if the market fails to see combined fiscal and monetary steps by the government, and that the BOJ deploys a conventional policy mix,” Takashima notes. Still, Citigroup factors in a 55% chance for the BoJ to take action this week.

Deutsche Securities – Markets factor in lower deposit rate to some extent

Deutsche Securities cite that the bond market traders are expecting the BoJ to take action this week although expectations for extra easing are starting to recede due to higher Tokyo stocks in hopes for a robust fiscal stimulus package. Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities, said, “It all depends on the BOJ decision. BOJ easing may take the form of a lowering of the negative rate on reserves commercial banks park at the central bank and an expansion of the central bank’s ETF purchases. The market has already factored in a lower deposit rate to some extent.”

The Bank of Japan will be meeting on Friday, July 29^th. The policy meeting will also coincide with the inflation data for June. The BoJ’s core CPI is expected to rise 0.70% on the month, slower than the 0.80% increase seen in May and marking a two-month consecutive decline and down from 1.30% inflation rate logged in December 2015.

Karl Schamotta, from Cambridge Global Payments, sums it up aptly, saying “We suspect that expectations for additional quantitative easing have been blown out of all proportion, with market participants making large leveraged bets that Haruhiko will be forced to activate his high-speed printing presses at next week’s meeting. Instead, it seems quite possible that the institution will issue an unnaturally positive forecast and hand the baton to the government, forcing Shinzo Abe to launch a fiscal stimulus programme in the months to come. Either way, the stage is set for further yen volatility in the coming week.”