- Amidst a very busy week, the BoJ holds its sixth rate-setting meeting
- Market is not expecting fireworks; there is increasing commentary about negative rates
- The decision will come on Friday 03.00 GMT, press conference shortly afterwards
The week is expected to close on a high note
The Bank of Japan is holding its sixth meeting for 2023 on Friday, two days after the key Fed meeting. Despite the yen’s underperformance making new headlines, the BoJ is not expected to announce a change in its main interest rate. However, the market is curious whether the BoJ is ready to proceed to another amendment of its monetary policy toolkit, especially if the Fed opts for another rate hike on Wednesday.
At the last meeting in late July, the BoJ widened the boundary of its yield curve control (YCC) framework. This was seen as a shy first step towards the eventual normalization of monetary policy, as bond yields were finally allowed to increase a tad. The post-meeting BoJ members’ comments didn’t diverge from the usual commentary, closing the door to the buildup of hawkish expectations. However, the overall sentiment appears to have changed somewhat after Governor Ueda’s September 10 comment.
His “quiet exit” remark reignited market rumours that the BoJ is finally preparing to abandon its ultra-loose monetary policy stance. Further adjusting the YCC framework seems to be the easy next option for the BoJ, but the market is focusing on negative rates. The BoJ’s target rate has remained at -0.1% since February 2016. Interestingly, BoJ’s Tamura has already been on the airwaves downplaying the importance of a possible return to positive rates, by stating that the abandonment of negative rates is not the same as monetary policy tightening. Therefore, the BoJ policy board has probably already discussed this move and it is expected to be part of the discussion again this week.
Data releases failing to surprise on the upside lately
The basis for any BoJ move is the economic outlook. The strongly positive GDP figures for the second quarter of 2023 have been followed by mixed data. Similar to other countries, the housing sector remains under pressure with the July housing starts dropping very close to an 8-year low, and labour cash earnings showed a considerable slowdown in July. On the flip side, the PMI surveys remain optimistic, especially when compared to the euro area figures.
However, the BoJ’s focus falls squarely on the inflation data and wages. The August Tokyo inflation print surprised on the downside. If this tendency is confirmed by the national data, on Friday we could see the headline CPI dropping below 3% for the first time since July 2022. Various BoJ members have stated that inflation is expected to gradually re-accelerate after a period of slowdown. Therefore, a possible downside surprise could affect market sentiment, but it will probably not change BoJ’s strategy going forward.
Wages have emerged as the key input in BoJ’s analysis
What is affecting the BoJ members’ attitude are the developments in wages. Since the record-breaking wage agreements in April 2023, retail sales have been registering strong annual increases. For this trend to continue, firms need to continue with their aggressive wage hikes, further fueling spending and helping the public overcome the deflation mentality of the past decades. Importantly, Ueda stated that by year-end the BoJ could have enough on the 2024 wage negotiations. This could mean that a rate hike could be firmly on the agenda at the December 19 meeting.
The yen needs help, especially if the Fed hikes on Wednesday
The yen continues to suffer against most currencies with the US dollar-yen pair making a new 2023 high and reaching its highest level since November 4, 2022. With the Japanese authorities limiting their reaction so far to verbal interventions, the burden falls on the BoJ to provide some support to the ailing yen. If the BoJ maintains its current stance on Friday, the US dollar-yen pair could set sail for the October 21, 2022 high at 151.94.
On the flip side, should the BoJ manage to surprise on Friday, we could see yen bulls staging a pullback similar to the mid-July correction with the main target being the 144.99 area. However, such a move could prove excessive and premature if the economic data don’t start to improve significantly over the next few trading days.