BOJ Interest Rate Decision Preview

The Bank of Japan is generally expected to keep policy unchanged, despite rising Japanese inflation- but the dive in the yen is creating chatter about some direct FX intervention.

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Sending a message

The BOJ is scheduled to meet later today, but already we got some clues as to what its stance will be. Yesterday, it once again announced unlimited asset purchases for a set period of time in an effort to stave off rising bond yields.

The USDJPY had been flattening out a bit after a failed run at the 130 level, followed by rumours that were later denied, that Suzuki and Yellen had talked about currency intervention.

The consensus is that the BOJ will likely not change policy, but there could be some changes to the outlook. Specifically, there is speculation that the economic growth forecast could be downgraded, and inflation outlook increased. Which wouldn't come as much of a surprise given that core inflation is starting to inch higher.


What to look out for

There was some speculation that the BOJ could allow the longer end of the bond curve to rise, as part of its yield curve control policy in an effort to slow declines in the yen. Some lawmakers have been expressing concern at the rapid drop in the currency. Meanwhile, raw material costs are starting to increase, which could have an impact on the tenuous economic growth the Japanese economy is seeing.

Attention is likely to centre around Governor Kuroda's interminable press conference for hints about what the BOJ will do about the currency. The consensus is for the BOJ to take a wait-and-see approach. But with the spread between interest rates at home and abroad continuing to rise, that could put increased pressure on the BOJ to normalize policy in the near future. How fast the rates rise in other countries could be the indicator for how much pressure the BOJ is put under.


GBP/JPY

While USD/JPY has been consolidating just under the big 130 figure, some of the other yen crosses are setting big monthly reversals.

GBP/JPY has almost erased its entire April gains, creating a large shooting star pattern on the monthly chart (not confirmed until month finishes on Friday).

The reversal possibly sets up a re-test of the key multi-year breakout level at around 157.

Source: Spreadex trading platform

Key takeaways

The BOJ is unlikely to change its stance, but it might raise the inflation outlook and downgrade growth. The depreciating yen is encouraging speculation that the BOJ might undertake new stimulus measures- or possibly directly intervene in markets. Governor Kuroda is facing a lot of pressure from the markets to do something about yen, and this could force him to increase interest rates.