Investing.com-- The Bank of Japan is widely expected to keep interest rates unchanged when it meets later in June, but is likely to scale back its bond purchases to somewhat tighten monetary policy, UBS analysts forecast in a note.
The BOJ is set to keep its policy rate at 0% to 0.1%, after a historic hike in March. But it is expected to begin cutting its purchases of Japanese government bonds (JGBs), which are currently above 6 trillion yen per month- the same amount as those seen in March, UBS said.
A reduction in the BOJ’s bond purchases heralds lower amounts of liquidity being released by the central bank into Japanese markets, which heralds tighter monetary conditions. Lower bond purchases are also a softer form of monetary tightening than outright rate hikes.
Japanese 10-year yields slid to over two-week lows this week.
The BOJ may also be more geared towards softer tightening after inflation readings for the past two months somewhat underwhelmed. UBS said the BOJ will update its policy statement to reflect plans to reduce its bond purchases.
Some BOJ watchers expect another rate hike from the central bank to stem recent depreciation in the Japanese yen, which had largely weakened past government intervention efforts in May. But UBS argued that the Ministry of Finance had greater impetus to manage the currency market over the BOJ.
Additionally, BOJ officials including Governor Kazuo Ueda said they will only hike rates if yen depreciation stood to impact inflation.
“We do not think that the BoJ could raise the rate sufficiently to appreciate JPY without this weighing on domestic demand, an outcome it would likely want to avoid,” UBS analysts wrote in a note.
UBS expects the BOJ to only hike rates by October, to 0.25%, although a surprise hike in July may not be ruled out.
Recent wage data for April showed some progress towards improving consumption and higher inflation, as forecast by the BOJ. Average cash earnings grew more than expected as wage hikes won by Japanese labor unions earlier this year took effect.