BOJ, YCC and the New Governor

The BOJ is not expected to announce any policy changes, but traders are going to be scrutinising this meeting to get a better understanding of the new governor.

Reading the Tea Leaves

When a new leader comes in, it's expected there will be changes to how things are done. Even if the monetary policy is expected to be the same, how the central bank communicates to the market is very important. Typically, the BOJ is quite reserved, preferring to surprise the market with moves to enhance its effect. This means that traders often put more emphasis on trying to interpret the governor's comments. Former BOJ Governor Kuroda got good at hiding the ball in his extended post-rate decision press conferences. It's natural to expect some adjustment period with the new governor, so traders might be wary of what happens at the first meeting under Kazuo Ueda.

Along with the meeting, the BOJ will release its quarterly forecast of economic conditions, which could shape future policy decisions. There will be particular emphasis on the inflation and growth forecasts, which will be understood in the context of comments by Governor Ueda and how soon any potential change will be coming.

The Inflation Issue

The BOJ has been battling low inflation for decades, which is the impetus for ultra-low interest rates. Inflation rose last year as the yen weakened, which is understandable given Japan depends on imports for a lot of consumer goods. That inflation has started to subside now that the yen has gotten stronger. The new governor appears to be taking this into account since he keeps talking about the problem of too-low inflation.

The tool mainly in focus is yield curve control (YCC), in which the BOJ buys bonds to keep the yield on JGBs in a narrow range. The most recent move was to widen that range in what was deemed a "policy-neutral" action. But since all the pressure is on the upside, the move was effectively a raise on the allowed rate of yields. The debate now is whether and when the BOJ will widen the band again or do away with the policy entirely, which would imply a reduction in the amount of JGB the BOJ would be buying, allowing further appreciation of the yen. The next meeting could be an opportunity to set the groundwork for such a change. Therefore, it's likely to be addressed in the post-rate decision press conference, with the market reaction potentially hinging on how the governor phrases his responses to press questions.

USDJPY in Correction Mode

USD/JPY has been in a corrective phase since the low of 127.22, marked by an ascending channel. The correction could have ended at 137.91 unless it is still ongoing and another leg above the aforementioned peak is due.

In the medium term, the low of 129.64 appears to offer a similar corrective pattern unless the move up to 135.13 is a wedge. If so, the shorter terr channel might hold potential bearish action and lead to further upside. Losing the channel low though, might open the door to 131.75 if 133.00 succumbs to potential pressure. Conversely, the break of 135.00 might see prices rise toward 138.00, provided 135.81 gives way to bulls.

Source: SpreadX USD/JPY

Key Takeaways

The Bank of Japan (BOJ) interest rate decision under the new Governor may impact the Japanese government bonds (JGBs). While no policy changes are expected, traders will be analysing the meeting to understand the new governor's approach. The BOJ has been battling low inflation for decades, and the tool mainly in focus is yield curve control (YCC), in which the BOJ buys bonds to keep the yield on JGBs narrow. However, there is a debate on whether and when the BOJ will widen the band or do away with the policy entirely. The market reaction could hinge on how the governor phrases his responses to press questions at the post-rate decision press conference.