BOJ Expected to Keep Policy Stance

It is widely expected that the BOJ will maintain its current policy stance at the conclusion of its upcoming two-day monetary policy meeting on Tuesday. However, investors will be keen to determine whether there are any signs that a policy shift may occur soon.

The Data Offers More Time to BOJ

Economists polled by Reuters unanimously agreed that the BOJ will leave its policy unchanged. Just one economist suggested the central bank may tweak its forward guidance to signal a move towards gradually unwinding its ultra-low policy. The majority still indicates that Japan will exit negative interest rates by the close of 2024. However, recent economic data and events have provided scope for the BOJ to maintain its stand for the time being.

Core CPI slowed for a second consecutive reporting period last Friday, matching forecasts reflecting possible pressure from the earthquake on January 1. Attention will now turn to "shunto" spring wage negotiations between companies and labour unions, typically from mid-January through March. The BOJ will monitor signs of steady momentum in the jobs market before tightening policy. While inflation weighed on the economy in mid-2022, these pressures have eased in recent months, allowing more time for the BOJ to assess the outlook.

Finding the Opportune Moment

The BOJ meeting may provide some signals of its policy intentions. Policymakers will update projections for CPI and GDP growth over the coming year, allowing investors to scrutinise the data for clues on the potential timing of an interest rate hike. BOJ Governor Ueda has acknowledged improving inflation and growth trends but notes ongoing uncertainty, including from disaster recovery efforts. This may lead the central bank to maintain its stance for now.

Market participants anticipate the BOJ will exit negative rates following its June meeting, providing three opportunities to telegraph policy messages. This indicates fading market expectations for a bolder policy response, considering recent lacklustre price pressures and currency depreciation. As Japan relies heavily on imports, a weaker yen lowers consumer costs, which could ultimately dampen inflation. The BOJ may simply prefer to evaluate additional economic data releases before taking action, with its next meeting scheduled for mid-March.

C&H or Short-Term Correction

USDJPY has pulled back in the longer term since meeting resistance at 151.20 and formed a double top. However, the downward leg could be the handle of a cap-and-handle pattern, pending further upside following a breakout past the peak, towards 153 and beyond. Short-term resistance levels at 149.15 and 150 will be critical for concluding the C&H pattern. If the 144.45 swing breaks down, the upside move off 138.60 may be a simple correction, with 142 opening the door to the C&H's invalidation.

Source: SpreadEx

Key Takeaways

The BOJ is widely expected to maintain its ultra-loose monetary policy at its Tuesday meeting. While some economists suggest the BOJ may signal a gradual shift in policy, most expect interest rates to remain at current levels through 2024. Recent economic data allows the BOJ more time to assess the outlook before tightening. The meeting may provide clues on the BOJ's policy intentions through updated economic projections. However, BOJ Governor Ueda has stressed ongoing uncertainty, suggesting the central bank will likely keep policy unchanged for now. Market participants anticipate the bank may exit negative rates following its June meeting, indicating reduced expectations for a bold policy move soon, given soft inflation and a weaker yen.