Bank of Japan (BoJ) preview: what to expect

The central bank should once again head for the status quo

The Bank of Japan (BoJ) is one of the latest central banks to jump on the bandwagon for rate hikes, with its accommodative monetary policies also set to remain for the next July meeting. Current market expectations are unanimously for the status quo and, longer term, the probability of a 0.10% rise is pegged at just 3.7% for the September meeting, while increasing to 22.3% at the October meeting. BoJ Governor Haruhiko Kuroda recently stuck to his view last week that Japan’s economic outlook still carries “very great uncertainty” and maintains the central bank’s willingness to step up stimulus if necessary. The reiteration of his usual advice aims to push back any hawkish expectation, which has previously built on the history of the weaker yen.

Keeping its current policy unchanged will include maintaining its target of -0.1% for short-term rates and the upper limit of 0.25% for its 10-year bond yield. The BoJ has so far proven its resolve to keep its yield curve control (YCC) intact with aggressive bond buying, in a bid to fend off bond traders looking to challenge its policy status quo at many times.

The Weak Yen Story May See Some Relief For Now

As talks of a 100 basis point (bp) hike surface after the US consumer price index (CPI) upside surprise in June, USD/JPY is currently near a new 24-year high. Concerns over the rapidly weakening yen continue to be highlighted, but so far there has been an absence of currency intervention after months of blasphemy. With Japan being a major oil-importing country, pressure from high energy costs with a weaker yen may ease as oil prices are down more than 20% from their June peak. This could help justify the no-change policy at the next BOJ meeting as the BoJ continues on its course of divergence with other global central banks.

Outlook report to provide further update on economic conditions

The next BOJ meeting will also see the release of its quarterly outlook report, which could lead to an upward revision to the inflation forecast above its 2% target. The previous forecast of 1.9% might seem underestimated, as core inflation in April and May this year is already above the 2% mark. That said, the BoJ has remained firmly on its view that cost inflation is temporary and should emphasize stronger wage growth for any sustainability of its 2% inflation target. With Japan’s average money incomes yet to experience a significant recovery (1.0% year-on-year (YoY) in June), the status quo in monetary policies is likely to continue.

It could also be justified by a potential downward revision to growth projections, from the previous 2.9% for fiscal 2022. A record level of daily Covid-19 cases seems to bring back questions about the reapplication of restrictions virus outbreaks and although there has been some pushback from authorities on this, the possibility that measures will come into effect remains as the upcoming summer holidays in Japan will pose new risks for the spread of the virus.

Japan 225: Improving Risk Sentiment Leading to Break Above Trendline Resistance

Improving risk sentiments led the Japan 225 Index to breach a confluence of resistance at the 27,000 level, where a declining trendline coincides with a key 38.2% Fibonacci retracement level. The formation of a new high, after a recent low, seems to indicate a short-term uptrend. This is accompanied by improving technical indications, with the Moving Average Convergence Divergence (MACD) attempting to break above the zero bar. Further upside may put the 27,645 level on watch as a next leg of resistance.

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