Bank of Japan Decision Preview: Here's What Wall Street Expects

Submitted by RanSquawk

The Bank of Japan (BoJ) will conclude its final policy meeting of 2017 at some point on Thursday. The BoJ is expected to leave its monetary policy settings unchanged as it has done for the entirety of 2017, which would see the Bank maintain its QQE with Yield Curve Control (YCC) and a 10-year yield target of around 0% and leave its benchmark interest rate at -0.10%.

As usual, there is no exact timing for the decision, and it could be announced any time after the start of the Tokyo lunch break at 0230GMT/2130ET/1030HKT.

Today's announcement could be more eventful than usual, with focus on the accompanying statement following reports which have suggested that there could be a tweak in the central bank's language due to dovish dissent. Policy board member Goushi Kataoka has proven to be more dovish than his peers since he joined the board in July 2017, holding the view that the currently monetary policy stance is insufficient as it will not push inflation up to 2% during FY 2019.

Elsewhere, the commentary from other BoJ officials continues to show support for the Bank's ultra-loose stance. Governor Haruhiko Kuroda has reiterated that Japan remains far away from its 2% price target and that the BoJ will persistently continue with its powerful monetary easing. Furthermore, BoJ's Amamiya also advocated the need to persistently continue with the current monetary easing, while board member Masai noted the importance of showing a determination to create stable prices, while she also highlighted that YCC is powerfully supporting the economy.

Recent data releases have been varied which points to no sudden need for any near-term policy changes. Headline CPI stood at 0.2% Y/Y in November, while the core metric came in at 0.8% Y/Y, still well short of the BoJ’s 2.0% target.

Conversely, economic growth figures have been more encouraging after a recent stellar upward revision for the Q3 annualized GDP reading to 2.5% vs. Exp. 1.5% (Prev. 1.4%), while the latest Tankan survey was somewhat inconclusive, as the large manufacturers index came in better than expected, although the outlook and capex readings disappointed.

Any significant changes to the board’s rhetoric to conform with the known reflationist Kataoka could potentially underpin the USD/JPY cross and domestic indices, while the reverse may be true if a dovish tweak fails to materialise or if there are any significant statements regarding increasing costs of pro-longed ultra-loose policy (a topic which sources have suggested officials are becoming more vocal about).

Looking ahead to 2018, the main focus will be on whether Kuroda is reappointed as Governor when his term ends in April (which is what the consensus currently expects). However, Japanese Prime Minister Shinzo Abe has kept his cards close to his chest so far, and although other touted potential candidates, including two of Abe’s most trusted advisors, Etsuro Honda and Takatoshi Ito, have both shown their dovish leanings, anything other than Kuroda’s reappointment could be viewed as somewhat of a disappointment given the current Governor's history of implementing unprecedented policy measures.

What The Bank Desks Are Saying

Barclays: We expect policy to remain intact and will focus on BoJ Governor Kuroda’s handling of any questions around the prospect of normalization, as well as any easing proposals by Policy Board member Kataoka.

Daiwa: Of course, consistent with the Tankan price indices, inflation remains well below target and has been rising only very gradually. In November, the BoJ’s forecast core measure (excluding fresh food) edged up to 0.8%Y/Y and its preferred core measure (which also excludes energy prices) was unchanged at 0.2%Y/Y. So, despite the unbroken above-trend economic expansion and highly favourable business conditions, when the BoJ Policy Board meets in the coming week, it will not want to reduce overall monetary accommodation, and we expect it to retain its existing main policy settings i.e. the -0.1% interest rate on banks’ marginal excess reserves and the pledge to keep 10Y JGB yields ‘at around zero per cent’.

HSBC: The very modest acceleration in income gains remains far short of what is required for the Bank of Japan (BoJ) to reach its price stability target of 2%. Consequently, the BoJ is likely to maintain its extremely easy monetary policy at the upcoming policy meeting, but the key focus is whether the Bank will give any hint of a premature exit from its commitment. We think it is unlikely as any pullback will dampen medium-term inflation expectations and result in a notable correction in financial market instruments, including the value of the yen.