Preview: BOJ Policy Decision

We’re kicking off a really busy day for the markets in Japan! We have a host of key economic events coming out. And Wednesday and Thursday concentrate the bulk of Japanese corporate earnings.

After Friday, we could have a pretty good idea of what to expect out of the Nikkei for the next couple of months We will also get a better understanding of the respective impact that it will have on the currency.

What we’re focusing on right now is the main event of the week: the BOJ’s policy decision early tomorrow morning. As for a change in the interest rate, that’s largely ruled out. But what can drive the markets is the tone set by the bank. And there isn’t all that much consensus on what to expect – even from BOJ officials themselves.

What’s the Thinking Here?

Up until Thursday, there was something of a consensus that the Big Three of central banks – the Fed, BOJ, and ECB – would move in tandem, as part of a race-to-the-bottom scenario with interest rates.

Given the strong consensus of a rate cut from the Fed on Wednesday, the thought was that an ECB rate cut would be followed by some significant easing action from Kuroda.

But the ECB didn’t deliver, and there are lots of reasons for the BOJ to not want to cut rates either. This has left analysts divided as to how likely it is that we’ll get action. And, if we do, how strong it would be.

The thing is, weakness in the Japanese economy and a lack of inflation are sort of the norm for Japan. So, there isn’t really a pressing need for the bank to do something corrective about it.

It’s Outside

The case can be made that the biggest problems the Japanese economy has, in the short term, are rooted overseas:

1. Other countries are cutting rates, reducing the bond differential.
2. The trade wars of the US are catching Japan in the crossfire (as they are also renegotiating their trade agreement with the US).
3. The political dispute between Japan and Korea is escalating into economic actions, as well.

These issues are at least hopefully going to be resolved in the short term. The BOJ is notoriously out of ammunition by already having negative rates. And pushing further into unconventional measures would come at a high cost. So, if the trade issues are resolved quickly, that high cost will be in vain.

What to Do?

The latest survey of economists by Bloomberg shows an increasing move away from the BOJ keeping a dovish stance. Granted, it’s still a minority. Only a third of the economists polled think that the bank’s next action will be a step back from their historic accommodative cycle. The majority are still inclined towards easing.

The consensus, such as it is, suggests the BOJ will modestly change some of its forward guidance, by extending the outlook of when they plan to keep rates ultra-low. This wouldn’t be seen as a response to fundamentals, but simply as trying to appease the markets.

If, however, it’s interpreted as the BOJ being unwilling or unable to take stronger action, it can lead to substantial strengthening of the yen.