Since it’s the first policy decision under new management, there is a lot of attention on the upcoming BOJ meeting. The consensus among analysts and economists is that there won’t be any change in policy. But traders will be keen to see what the new governor’s style and communication methods are, and what the new BOJ culture can imply for the markets.
This could be an opportunity for the new management to start laying the groundwork for any new changes that might happen in the future. Governor Ueda has repeatedly said he doesn’t want to surprise the market, which could be a departure from prior policy. Just how much advance notice will constitute “not a surprise” by Ueda’s estimation is one of the many questions traders will have about the new communication policy.
Reading the tea leaves
A lot of monetary policy analysis boils down to trying to clarify expectations for what central banks will do in order to get ahead of the market. This leads to intense scrutiny of central bankers’ comments on policy and the economic situation. With other major central banks, members of the monetary policy committees tend to be quite open and talkative, making this job somewhat easier.
Over the last decade, the BOJ has been notoriously opaque in its communication. This was because of a standing policy that shocked the market with surprise announcements and got a stronger response. The BOJ apparently felt that that was a way to get more market reaction out of monetary policy. Former BOJ governor Kuroda was famous for his interminable post-earnings press conferences that managed to not give any specific advance notice of policy changes.
The issues in play
The new management hasn’t explicitly said that it is changing this unofficial policy, but Ueda has been quite outspoken since getting the job. He has repeatedly said that what is expected to be the next main policy change, YCC, isn’t up for discussion for now, and the BOJ will hold the current course while studying potential future changes.
The theory among the experts is that any tightening of the BOJ will go in reverse order of the easing policies. Since Yield Curve Control was the latest policy to be implemented, it will be the first policy to be lifted. That is followed by unlimited bond buying, and only then would the outcome of negative rates be discussed. That’s why there is so much focus on YCC at the moment, and why it’s likely Ueda’s post-earnings presser will focus on that subject.
The inflation problem
Aside from the rate decision, the BOJ will also publish its quarterly outlook report, which will include its latest growth and price forecasts. If inflation is revised higher as expected, it could lead traders to expect a sooner lifting of YCC and give the yen a bit of a boost. On the other hand, if the economic outlook is cut, it could lead to speculation that the BOJ will want to keep easing longer to support the economy.
Japan experienced a bout of inflation last year which is wearing off without the BOJ making any major policy moves. Given Japan’s reliance on exports, the higher inflation was seen as caused primarily by a weaker currency. As the yen has strengthened recently, inflation has gone down, returning the BOJ to the prior situation when it was trying to raise inflation by boosting the economy. The implication could be that traders who are expecting a tweak to YCC might be disappointed for some time.
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