Previewing the BOJ’s Interest Rate Decision

Overnight we have the most important economic event of the month for the yen!

It’s not the interest rate decision, but rather the monetary policy statement and particularly, the press conference that comes after it. Usually, we see quite a bit of volatility in the yen around the BOJ’s actions. And with the heightened expectations this time around, we could see stronger moves in the currency.

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Schedule and Expectations

Typically, the decision and policy statement from the BOJ is released immediately after the conclusion of the policy meeting. This doesn’t tend to have a fixed time. So, traders must be sure to keep an eye on the economic calendar when trading the yen later today to get the exact time.

There is a broad consensus that there won’t be any change in the BOJ’s interest rate. Therefore, the focus is going to be entirely on how the bank is interpreting the latest data as well as where they see the economy and currency going in the future.

The key is to find differences in the language used in the policy statement. This change in language will alert us of any change in outlook. And this is what is likely to move the markets.

It takes some time to process the document, so depending on what is in it, there could be a few minutes of volatility. Then we move on to the next event that often adds a lot of ups and downs for the currency: BOJ Governor Kuroda’s press conference. The conference will take place at 08:30 CET (02:30 EST) and can last up to an hour.

The expectation among economists is that the governor will display a more dovish stance. There are some who have even postulated that there will be a further cut to the rate this time! This has allowed the market to pencil in a nearer-term rate cut.

The Issue at Hand

The problem that the BOJ is facing is that despite its best efforts, inflation remains at half the target rate, and the Japanese economy has remained sluggish. A significant portion of this is being attributed, both officially and by private analysts, to the global situation, particularly with the drop in exports.

Compounding this factor is the return of capital to Japan. This is because of economic uncertainty which is keeping the yen relatively strong, making exports difficult. The decision on Monday by the Trump administration to end Iranian oil export waivers drove up the price of crude, which further supports safe-haven flows. This keeps inflation pressures down in Japan.

What to Look For

Last time around the vote was 7-2 to maintain the rate and yield control pat. The market could see a change in the voting number a shift in sentiment. And this could cause a reaction even if the decision is to hold fast.

One of the alternatives to not cutting rates in the future as the majority of analysts are expecting is to increase asset purchases. Incidentally, the market could also interpret this as dovish.

Most likely, however, is a change in the outlook. This is especially true in relation to the world economy and exports. Last time around the bank projected weakness for the time being, but with a moderate rising trend.

The fly in the ointment here is that the trade dispute between the US and China is seen as the largest cause of the export issues in Japan. And the BOJ has no way of projecting when, if or how that will be resolved, and what that means for the markets.

With a lot of analysts projecting a dovish tone from the BOJ, it’s likely to be priced in ahead of time. Therefore, there is a distinct possibility of yen strength if the bank doesn’t deliver.