Bank of Japan’s policy meeting will kick off on Monday, but it will not be a usual two-day gathering this time as policymakers are expected to reach their decision the same day. While under other circumstances, such an adjustment would signal an eventful meeting, the current virus situation may pressure the central bank for additional corporate aid and likely some flexibility on government bond purchases, whereas there is no doubt that interest rates will remain steady.
May keep the focus on QE expansion
Although Japan has yet to experience a devastating virus outbreak of an Italian or US scale, its COVID-19 curve has not flattened either despite the recent slowdown in new cases. Heading into the Golden Week holiday season at the start of May, the government, which unlike other countries uses less enforcement measures to contain the virus spread, expanded the state of emergency to all districts last week until May 6, while after internal political pressure it has also boosted cash payouts of 100,000 yen ($930) to all citizens from 300,000 yen to a limited number of households previously. The latter is a part of a revised $1.1 trillion budget draft due for a parliamentary approval until May 6. At this point, it is worth noting that Japanese public debt is almost twice the economy’s $5 trillion size.
In addition to the public spending, the BoJ chief Haruhiko Kuroda said to his G7 counterparts earlier this month that he would not hesitate to ease policy if needed, increasing speculation that he could deliver extra stimulus too to spur demand when he meets with the Bank’s board on Monday.
With negative interest rates already hurting banks, the BoJ saved rate cuts for more difficult times last month and instead focused on growing its asset purchase program. Particularly, it pledged to double the risky EFT purchases to an annual pace of 12 trillion yen. Moreover, it promised to set aside 2 trillion yen for additional corporate bonds and commercial papers by September, and in a new step, to provide a loan worth up to 8 trillion yen against corporate debt as of the end of February with a maturity of up to one year.
Next week, markets are widely expecting Kuroda to take a similar action by keeping rates steady at – 0.10% and further expanding its QE funding. According to officials, the BoJ may double or triple the purchase targets of corporate bonds and commercial papers. But what would make investors raise their eyebrows is an announcement of unlimited government bond purchases as Thursday’s headlines with uncited sources warned the bank could do so. The yen tumbled by almost 0.60% on the news before quickly recouping most of its losses and could shift lower again next week if Kuroda indeed scraps the upper limit of 80 trillion yen per year on government bond buying, as this would imply an unlimited printing of money.
Could show some flexibility on government bond purchases
The BoJ however has not reached that target in a long time ago, meeting its goal of a zero-yield 10-year government bond with much fewer purchases instead. Although the Bank has already talked down the rumors, policymakers could discuss the possibility if their economic projections released alongside the monetary decision suggest that more is needed to be done to save the economy from a great recession. In this case, they may avoid scrapping the limit of bond purchases, expressing instead more flexibility on government bond buying.
Market reaction
Turning to FX markets, a more flexible purchase program on government bonds could still cause some downside pressure to the yen, with USD/JPY likley breaking above the symmetrical triangle on the four-hour chart to retest the area between the upper Bollinger band and Thursday’s high of 108.00. Should the pair close higher, the next stop could be somewhere near 108.50 and then around 109.00.
Otherwise, if the BoJ shows no willingness of relaxing its bond buying limits, the pair could retreat below the triangle and the 107.40 support area to challenge the 107.00 round-level. Another leg lower could stretch until the 106.00 number.
