BoJ Monetary policy meeting preview – No changes expected

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The Bank of Japan will be one of the last central bank meetings lined up for this year this week. The central bank is expected to make no changes with its QQE program and interest rates which currently stand at -0.10%. This comes amid nascent signs of improvement in the economy.

The BoJ meeting will conclude with the release of the monetary policy statement. Later, BoJ Governor, Kuroda is expected to host the press conference. During the press conference, Kuroda is expected to announce raising the yield targets or slowing down the asset purchases. This is however, subjective to the higher inflation expectations.

Japan’s inflation is still a long shot away from the BoJ’s 2% inflation target, comimg amid the fact that Kuroda’s term will expire in April next year. While it is unsure whether Kuroda will get another term, other front runners for the post of the governor position include PM Abe’s aide, Etsuro Honda. Honda has been vocal in his preference for aggressive monetary policy easing.

As a result, the BoJ is unlikely to make any major policy changes ahead of what could be a potential change of leadership in a few month’s time.

So far, the central bank signaled that it is in no rush to cut back on its monetary stimulus program as the nation continues to struggle to emerge from nearly two decades of deflation.

The broader economic outlook and inflation data hasn’t changed much in the past couple of months, which is expected to be one of the main reasons that the central bank will hold monetary policy steady.

Japan’s economy was seen rising at a pace of 2.5% from last years figures in the third quarter, ending September. This marked a seventh straight quarter of expansion for the economy and underlined the fact that the BoJ’s policies are helping the economy to slowly move out from the crisis-mode.

The BoJ has been purchasing the short term bonds in order to keep the yields near zero. But the central bank could be seen discussing on whether it should raise the yield targets or slow down its purchases.

There have been mixed calls from other BoJ members. The newest member of the board, Kataoka was vocal in expressing his views to increase the stimulus program in order to speed up inflation. However, this view did not gain much support from other BoJ officials who are wary of the rising costs of increasing monetary policy stimulus.

Despite the monetary policy being left unchanged, the BoJ could in the near term tweak its monetary policy framework for the year ahead. The BoJ’s QQE program has come under constant criticism for destabilizing the Japan’s banking system. This comes due to the negative interest rates and the lack of demand for funds.

Some officials at the BoJ also said previously that they central bank does not have to wait until inflation hits the 2% target rate. The divisions however are clear, as other members expect to stand pay on policy until there are signs of inflation accelerating.

Market expectations, based on views from various economists suggest that the BoJ’s next monetary policy action would be to start withdrawing its stimulus program. However, this is expected to come only in late 2018.

The Federal Reserve was the first central bank to begin not just withdrawing its QE purchases but also started to unwind its balance sheet. This was later followed by the ECB which has cut down its QE purchases to just 30 billion euro starting January 2018.

More recently, the Norges bank also gave a hawkish statement suggesting that interest rates could start to rise sooner than expected.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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