USD/JPY: Bank of Japan’s meeting preview

The Bank of Japan meets on Thursday to announce its monetary policy statement and to deliver its latest updated Outlook Report.

Here is a banks’ preview

Barclays

Barclays expects the BoJ to keep the settings on its monetary easing program intact as inflation remains well below the central bank’s 2 percent target.

The board shouldn’t make any changes to its current quantitative easing program despite the gradually reducing amount of available JGBs.

The quarterly Outlook Report will be released at the end of the meeting. Barclays doesn’t expect any changes in the bank’s GDP growth forecasts. But policymakers might change its core CPI projections for 2017 fiscal year.

Barclays analysts predict the BoJ slightly raising its target for long-term yields under the yield curve control program in the third quarter of 2017. This might offer some support to the yen. However, the prospects for such a move will heavily depend on the gradually rising inflation rates, stable financial conditions, weakening of the yen and pronounced acceleration of the US and China’s economic growth.

Nomura

Nomura analysts also expect the Bank of Japan to leave its ultra-loose monetary policy unchanged tomorrow as geopolitical risks in the Korean peninsula still exist. They will be safe haven supportive for the yen. The recent JPY depreciation after the first round of the French election has been a relief for the BoJ officials willing to stay on the sidelines this week.

On the Japanese currency front, Nomura believes the yen’s reaction to policy announcement would be muted as overall market expectations for any change are low.

The banks’ forecasts can be supported by the recent comments from the BoJ’s Governor Kuroda.

 Last week, he said that the bank will continue with its very accommodative monetary policy and maintain the current pace of asset purchases for some time as inflation rate is still quite sluggish.

The BoJ’s loose monetary policy lasts for already 4 years. So far, Kuroda is still far from his coveted inflation target. The bank is running up huge balance sheet since the outburst of the financial crisis. While the Fed is planning to trim its $4 trillion portfolio, Japan’s CB officials are not going to discuss its balance sheet problems in the near-term future.

"I don’t think our monetary policy is constrained by the fact that we have acquired 40 % of JGBs already, or our balance sheet is about 80% of GDP, which is certainly large compared with other central banks,” Kuroda notes in his recent interview. “We have acquired about 40 percent of JGBs outstanding. But that means that 60 percent is still in the market."

USD/JPY spiked to 111.50 in wait for the US President Trump’s tax proposal which is expected to ask for a reduction of the corporate rate to 15% from the current 35%. And bring the highest tax rate down to 25% from 39.6%. The problem is the lack of details on how these tax cuts will be implemented/funded. If Mr. Trump fails to provide us with details, the dollar can lose some of its recent gains. In the opposite scenario, the USD/JPY currency will rally higher above 112.