Market consensus of for now change of policy tomorrow, yet with bond markets continuing to give BoJ a headache then a change of some sort cannot be fully discounted at some point.
The Bank of Japan hold their monetary policy meeting tomorrow, which is already having a suppressive effect on price action as we near it. Alongside the usual press conference, statement and decision, the quarterly outlook report will also be released. As we expect no changes to policy tomorrow, it may be the outlook report that is more telling about their confidence of the recovery to be sustained. Yet we cannot rule out a surprise from BoJ regarding their 0% target on JGB’s.
Since their last meeting the game has changed somewhat; ECB have turned slightly more hawkish (which prompted BoE ad BoC to follow suit) whilst the FED turned slightly dovish. BoC have since raised rates and there is potential for another hike to follow this year. To add to the list, the RBA crawled slightly out of the neutral zone by speaking of a neutral interest rate being as high as 3.5%. So, from a global policy standpoint is has been a busy period since the previous quarterly outlook. This seemingly combined coordination to tighten is only going to add to the BoJ’s job harder regarding policy.
Since September ’16 the BoJ have been battling markets to keep the 10yr JGB’s ‘around’ 0%. This has proven a tough match at times, especially when global stock markets sell off amid expectation of central bank tightening which sends yields higher. As we continue to suspect that ECB are behind the curve and will later be forced to ‘talk taper’, this leaves bonds yields susceptible to further upside. In turn, this places extra pressure on the BoJ to keep their rising yields ‘around’ 0% as the bond market sell-off rags the 10yrs higher.
Additionally, there have been a couple of BoJ members which have constantly doubted the expansive pace of their QQE program and remain concerned at the financial stability or long-term impact of these actions. Additionally, a recent report, or leak, suggested liquidity concerns are only growing as the BoJ continue their purchase of assets. So, the question now becomes whether the BoJ may announce a change to their policy and of so, how will it be changed?
We do not think such a change will be announced tomorrow but we will look out for subtle clues with the outlook report. There is potential for the inflation forecast to be lowered (again) although markets are likely expecting this due to the lack of inflation in general. With household spending, low wage growth and weak producer prices it is hard to justify their forecasts, let alone a 2% target. A more telling sign may be if they slightly lower their growth outlook, as it is this part which was revised higher on three occasions since 2016. Whilst potential for growth remains, there are just as many headwinds with capex and machinery tool orders printing heavy declines.
We doubt BoJ will announce an end to the 10yr target tomorrow, but it is something that will eventually make sense if yields continue to rise. We note that USDJPY printed an important lower high just days after BoJ announced their new policy with Trump’s (now defunct) reflationary policies, sending it into hyperbole. Perhaps the reverse may occur if they are to throw in the towel on the 10yr target. This is something to seriously consider in the light of a hawkish Fed (weaker USD) and headwinds the BoJ face with this particular policy. We doubt it will completely reverse the moves seen since September, but it may have a decent move lower none the less.
