Preview: BoJ expected to keep policy settings unchanged

OVERVIEW

The BoJ is likely to maintain policy settings at its two-day monetary policy meeting which concludes on Tuesday with the central bank expected to keep rates at -0.1% and the 10yr JGB yield target at 0.0% with a target band of +/-25bps, while it will also release the latest Outlook Report which contains board members’ median forecasts for Real GDP and Core CPI.

PRIOR FRAMEWORK REVIEW

The consensus for the BoJ to keep policy settings unchanged is due to the timing as the central bank had only recently announced the conclusion of its framework review at the prior meeting in March whereby it was reported to have widened the target band to allow yields to fluctuate from the target by +/-25bps from +/-20bps as markets expected, although Governor Kuroda later stated during the press conference that the BoJ did not enhance the yield target range and that it was a clarification of the number of the yield range, not a change. The central bank also removed its annual ETF and J-REITS purchase targets but maintained the ceiling of those purchases at JPY 12tln and JPY 180bln, respectively, while it announced that it will now only buy ETFs linked to the TOPIX index. With this recent clarification of the wider than previously viewed yield band and tweaks to the stimulus programme which were aimed at making the BoJ’s ultra-loose policy more sustainable, it is seen as unlikely for policymakers to announce further adjustments in the immediate term.

MIXED DATA AND RENEWED COVID EMERGENCY FAVOURS A PAUSE

The recent data releases from Japan have been mixed as the BoJ Tankan report showed Large Manufacturers sentiment at 5 vs exp. 0 which was the highest since September 2019 and the Large Non-Manufacturers Index at its best levels in a year at -1 vs exp. -5, while Exports last month surged by 16.1% vs exp. 11.6% to register its fastest pace of increase since November 2017. Conversely, the latest inflation readings for Japan remained in negative territory as expected with headline CPI and Core CPI at -0.2% and -0.1%, respectively, while Household Spending data for February Y/Y slumped at -6.6% vs exp. -5.3% and Machinery Orders also disappointed at -7.1% vs exp. 2.3%, which prompted the government to cut its machinery orders assessment. These varied releases, therefore, add to the case for the BoJ to refrain from making any policy tweaks, while the ongoing COVID-19 situation in Japan where a state of emergency was reimposed in four areas including the capital of Tokyo is another factor likely to influence policymakers to adhere to a wait-and-see approach.

ANNOUNCEMENT AND OUTLOOK REPORT

As usual, there is no exact schedule time for the announcement which can be anytime after the start of the Tokyo lunch break from 03.30BST/22.30EDT and as no change in policy is seen as a foregone conclusion, focus will be on the statement for policy clues and whether there are any changes to the central bank’s rhetoric. However, the BoJ is unlikely to provide any major deviations from its usual script and Governor Kuroda has reiterated on several occasions that they are not at the stage to debate a specific timing and means for exiting the ultra-loose policy including ETF buying. The Outlook Report will also be eyed for the central bank’s latest forecasts as a prior source report recently stated the BoJ is to consider lowering its inflation forecast for the current fiscal year, although this wouldn’t be much of a surprise given the continued negative inflation readings for Japan and as the central bank has repeated the view that consumer price growth will remain negative for the time being but then rebound and gradually accelerate the pace of increase thereafter.

Prior Outlook Report:

Real GDP

• Fiscal 2020 median forecast at -5.6%.
• Fiscal 2021 median forecast at 3.9%.
• Fiscal 2022 median forecast at 1.8%.

Core CPI

• Fiscal 2020 median forecast at -0.5%.
• Fiscal 2021 median forecast at 0.5%.
• Fiscal 2022 median forecast at 0.7%.