Economists are unanimous in expecting that the BOJ will keep rates unchanged at the end of its meeting on Friday. Futures markets agree. But some complications could move the USDJPY in the aftermath of the meeting.
The focus for the markets will likely be BOJ Governor Kazuo Ueda’s extensive post-rate decision press conference. There, he might give clues about when the next rate hike will be. He could also provide some details on what the BOJ will do with its large ETF holdings, which are an issue that could indirectly affect the yen. Some analysts suggest that it might be possible that an October rate hike might be hinted at.
Why the Hold?
Japan’s inflation rate at 3.1% is well above the BOJ’s 2.0% target. August CPI is scheduled to be reported just hours before the BOJ rate decision. Economists anticipate that the August inflation reading will decline to 2.8%, as food price increases slow down. The more closely followed core rate is expected to dip to 2.7%, also from 3.1% a month earlier. A declining inflation rate is typically an indicator for the central bank to be less inclined to raise rates.
But, at 0.5%, Japan’s policy rate is well below what economists generally view as being “stimulative”. That is, it is likely to cause inflation by stimulating economic activity. So, even though the inflation rate is coming back into line for now, the BOJ’s policies could cause it to surge again if rates aren’t increased. For this reason, many economists believe that other factors are more important for the BOJ’s monetary policy decision on Friday.
When is the Next Hike?
The ruling LDP party is holding internal elections to decide who will be its leader, and therefore, the Prime Minister of Japan. Several candidates have thrown their hats in the ring, ranging in views on monetary policy. Some are seen as aligned with caretaker PM Shigeru Ishiba’s more hawkish views on spending, while others are seen as greatly expansionist. Who wins will determine fiscal policy, and by extension, could affect what the BOJ does as far as rates are concerned.
Typically, central banks like to keep out of political contests, unless there is an economic emergency. That’s one reason for the BOJ to continue to cite uncertainty and wait until October to change policy. The other major factor is Japan’s reliance on trade as an economy. The recent trade war with the US was expected to have a negative impact on economic activity. But now Japan has a trade deal, adding certainty, and it seems that BOJ officials are growing increasingly confident that the country won’t fall into a recession that would necessitate keeping rates low.
What to Look Out For
The majority of economists expect the BOJ to hike one more time this year, most likely in December. Futures markets are pricing in that possibility as well. The main thing that could shake up the markets is if Ueda drops hints that the rate hike could happen at the October meeting instead. This would likely be bullish for the yen.
The other issue is if Ueda talks about how the BOJ will run off its ¥37 trillion in exchange trade fund (ETF) holdings. The move could weigh on the Nikkei and deter foreign investors, which could in turn weigh on the yen.
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