BoJ Preview: Forecasts from six major banks, policy changes in response to JPY weakness

The Bank of Japan will hold its policy meeting on Thursday, April 28 at 03:00 GMT and as we get closer to the release time, here are the expectations forecast by the economists and researchers of six major banks.

The BoJ is unlikely to announce any changes to its monetary policy settings, maintaining rates at -0.10% while holding onto its pledge to buy J-REITS at an annual pace of up to JPY180 bln. The central bank, however, is expected to upgrade its inflation forecasts amid a fragile economic recovery.

Standard Chartered
“While we expect the BoJ to keep policy rates on hold, it may signal policy changes in response to sharp JPY weakness. Rising US and global bond yields have turned yield differentials further against the JPY, pushing the currency to multi-year lows. Sharp JPY weakness (down c.11% versus the USD and c.8% on a NEER basis since March) has raised concerns among Japan’s policymakers. We believe the BoJ may have to increase YCC flexibility, by widening the band or shifting the YCC target to a shorter tenor, amid a persistent global bond sell-off and rising JPY weakness concerns.”

TDS
“BoJ’s commitment to YCC has been severely tested. While we do not expect the Bank to follow verbal intervention with actual FX intervention there is potential for a widening in the YCC band. An alternative is to shift the target bond from the 10y to a shorter maturity bond. The BoJ is likely to raise its inflation target to somewhere between 1.5% to 1.9% for FY 23.”

SocGen
“We expect the BoJ to maintain its monetary policy, but the forward guidance is likely to be changed slightly, relaxing its stance to keep the 10-year rate below +0.25%. Also, the BoJ will probably raise the core CPI forecast but lower the growth forecast for FY22.”

BBH
“Another dovish hold is expected after the bank defended its Yield Curve Control again last week. Reports suggest the Bank of Japan will probably raise its FY22 projection for core inflation to 1.5-1.9% vs. 1.1% in January and will probably cut its FY22 growth forecast from 3.8% in January. However, officials stressed that there is no need to tighten policy as the inflationary impact from high oil prices is seen as temporary. This supports our view that Governor Kuroda is likely to maintain current policy through the end of his term in 2023, leaving it to his successor to tighten if conditions warrant.”

MUFG
“We expect at the very least the BoJ to alter its guidance which currently is biased to further easing. Governor Kuroda in addition could launch another ‘policy assessment’ like in March 2021 which coincided with a widening of the 10yr JGB yield band to +/-25bps. It is clear that global yields and inflation in Japan would be consistent with a potential change. If some change in stance is confirmed, it would provide some narrowing of the divergence between BoJ policy and MoF concerns over JPY weakness.”

Citibank
“We expect policy to be kept on hold as there appears to be no change in Governor Kuroda’s basic view that a weak yen remains an overall plus even as he readily acknowledges that the excessively fast forex movements provide a tailwind to rising import prices which increases the burden on households and erodes earnings of SMEs that cannot pass on higher costs. We also point to current forward guidance on BoJ interest rate policy that is linked to COVID-19, which has yet to be contained sufficiently. What about forex intervention? – while the US might accept smoothing operations designed to slow yen’s depreciation, the USD pushback would probably be no more than limited and temporary if unaccompanied by monetary policy change.”