Bank of Japan Preview

The Bank of Japan (BoJ) will announce its monetary policy decision on Thursday, July 21 at 03:00 GMT.

The central bank is expected to keep interest rates unchanged as the policymakers are committed to keeping a dovish tone to revive the overall demand in the economy. The BoJ is focused on keeping the inflation rate to 2%.

Reuters reports that the ”Bank of Japan Governor Haruhiko Kuroda said on Monday the central bank was closely watching the impact currency moves could have on the economy, warning of ‘very high uncertainty on the outlook due to rising commodity prices.”

“We won’t hesitate to take additional monetary easing steps as necessary” with an eye on risks, Kuroda said in a speech to a quarterly meeting of the central bank’s branch managers. Kuroda also repeated the BOJ’s policy guidance that the bank expects short- and long-term interest rate targets to “move at current or lower levels.”

Going into the last BoJ meeting, the apparent concern was the JPY weakness, but the critical aspect of this is whether there will be action from the BoJ. For years Japan has struggled to see any inflation, so with inflation rising around the world, it was interesting to see that the BoJ now does expect consumer inflation to rise. It also notes that short-term inflation expectations have risen. However, this is mainly attributed to energy prices and commodity gains. Both factors are expected to fade, and medium-term inflation will fall back lower again.

As we get closer to the release time, here are the expectations forecast by the economists and researchers of Three major banks.

Standard Chartered

“We expect it to keep the policy balance rate and 10Y yield target unchanged in July; the ruling LDP’s recent landslide election victory provides a strong mandate for PM Kishida and BoJ Governor Kuroda to maintain the dovish monetary policy stance. The BoJ has been under pressure as Japan’s inflation has risen above 2%. However, Kuroda has reaffirmed that the BoJ will maintain its dovish stance to support the economy. Separately, Japan will release national CPI data on 22 July. We expect CPI inflation to have eased to 2.4% YoY, supporting a dovish stance by the central bank. We think it is too early to say if Japan’s CPI has peaked, with core inflation rising, indicating that inflationary pressure on the demand side is growing.”

BofA

“We expect the BoJ to deliver a one-off rates adjustment in 2H CY22 (base case October), consisting of a hike to the short rate target (to 0.0-0.1%) and a shift in the YCC 10yr target permissible trading band to +0.0-0.5%. But we think it is too early for the BoJ to capitulate and see no change to YCC this week. They are right to remain dovish, as core inflation remains well below 2%, while headline inflation at 2.5% is the lowest in G10. Still, given how much JPY has weakened, some verbal intervention is likely. This may prevent further JPY weakness, but is not enough for a turn.”

Deutsche Bank

“While we expect no change in the current monetary stance and forward guidance on policy rates, the BoJ’s Outlook Report is expected to show a downgrade in its growth forecast for FY2022 and an increase in its inflation forecast. The national CPI print will be due the next day and our economist expects core inflation (ex. fresh food) to climb to 2.2% YoY (+2.1% in May) and core-core inflation (ex. fresh food and energy) to 0.9% (+0.8% in May). Small fry in a western context but relatively strong for Japan.”