The Bank of Japan meets on January 21st to set its monetary policy. On the agenda and a question on everyone’s mind is how the BoJ will react to the falling inflation, induced by falling crude oil prices. One camp of economists estimate that BoJ Chief Kuroda will probably lower the Central Bank’s inflation expectations, while on the other side, there is also a strong consensus that whilst addressing the issue of inflation, Kuroda might as well shrug off the weak inflation as temporary. Kuroda had embarked on what is being termed as an ambitious venture to target the 2% inflation rate ever since he took office in March 2013. If the economists calling for a cut in inflation expectations do come out right, then it is likely that BoJ could lower its inflation from current 2% to 1.5%, lower than October’s projections of 1.7%.
While there is a wide consensus that interest rates will not be changed, one cannot discount any possibility including a surprise expansion to the BoJ’s QQE stimulus especially as the markets head into a crucial week, awaiting the QE announcement from ECB’s Mario Draghi. It would be a tough call in regards to any surprise expansions in light of the fact that bond yields are already well into negative territory on account of the bank’s past stimulus programs.
In the past, the Bank of Japan did its bit to surprise the markets by announcing additional stimulus in October 2014; just a day after the US Federal Reserve ended its quantitative easing policy. While the surprise factor worked in BoJ’s favor, briefly weakening the Yen dramatically while boosting the Nikkei which touched new yearly highs above 17000 psychological levels, over the months, the Yen managed to strengthen on a risk-averse sentiment.
Although the Yen remains well above the levels of 110, the prize zone from where the surprise QQE induced rally started, recent weeks have shown the Yen managing to grow stronger across the board. If one has to consider the fact that the BoJ might want to get in ahead of the ECB and going by its surprise announcement in October last year, we could very well expect to see the unexpected. Of importance is to bear in mind that this policy meeting comes hot off the heels from December’s snap election, where Japanese Premier, Shinzo Abe had dissolved the parliament and called for snap elections. The victory clearly gives the mandate to Abe to push along with his Abenomics reforms.
In the run up to tomorrow’s BoJ monetary policy decision, the Japanese Yen weakened, while the Nikkei225 managed to gain as much as 1.4%. However, any disappointments in terms of no additional stimulus or no change to the inflation expectations could likely see the Yen continue to gain strength this week ahead of the ECB’s monetary policy meeting due on 22nd January.