What Will BOJ Do with the Interest Rate?

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“Conserving Ammunition” seems to be the watchword going into the BOJ’s interest rate decision, which we are expecting later tonight.

There had been some talk that they might cut rates in line with the global race to the bottom. However, those expectations have since evaporated as we have gotten closer to the meeting. The last potential nudge for the BOJ to relax policy would be if the Fed cuts for a third time later today.

That doesn’t mean we aren’t expecting there to be some movement in the currency as a consequence of the policy meeting. The BOJ had previously hinted that it would take action in this meeting.

And, even if the chances of a rate cut have diminished, it doesn’t mean that other measures won’t be announced.

The Chances of a Rate Cut

As recently as the last BOJ meeting, Governor Kuroda said that further negative rates would be an important part of easing. Especially should the bank decide that it is necessary. This led to expectations of a rate cut being a possibility.

Since then, however, we’ve had some important geopolitical developments.

First and foremost is the generally positive outlook for resolving the US-China trade dispute. There’s also the increasing optimism that a deal will be signed at the APEC meeting in Chile, in less than three weeks’ time.

A deal would ease Japan’s trade situation, which is seen as the primary cause of weakness in the economy.

Arguments For

The primary argument at this point for why the BOJ would want to cut rates is to maintain the spread with the US.

This would mean that if the Fed cuts rates, it would increase the likelihood that the BOJ would as well. However, with more optimism in the markets in general, some analysts are saying that the Fed will hold off this time around. At least to see what happens at the APEC meeting.

While some analysts have called for a rate cut, what investors are doing with their money shows an expectation that the BOJ will hold.

Japanese Government Bonds (JGB) yields have been rising, and so has the Nikkei. And the BOJ has a good reason to keep their powder. A recent study by S&P shows that a further 0.1% rate cut would push almost all of Japan’s regional banks into the red. This would cause the already unsteady financial sector to be under pressure.

It’s Not Just the Interest Rate

Traders will want to scrutinize the Policy Statement that comes out along with the rate decision to see if there is any change in the wording that would increase the likelihood of a cut at the next meeting.

Also, this time around we get an Outlook Report. There, we expect the BOJ to cut its economic forecast. This would also be interpreted as a signal that the bank will take action.

“Take action” might be the keyword here. After a prolonged period of negative rates not getting inflation anywhere near target, the BOJ might look at alternative measures.

One of the potential measures would be increased buying of bonds. Another might be cutting rates in tranches, similar to what Switzerland has done.

Summary

Of surveyed economists, a majority believe that the BOJ will hold pat this time around. And those who say a cut will happen, expect some additional measures to help banks. But when asked on a longer timeframe, 70% see a rate cut by the end of January.

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