Bank of Japan to remain on hold, awaiting for Abe’s decision - Danske Bank

Next Tuesday is the Bank of Japan meeting. Analysts from Danske Bank do not expect the BoJ to be close to tightening yet. They will be listening closely whether Kuroda will comment on the current de facto tapering. In their main scenario, they still expect him to be reappointed and the BoJ to keep its current ‘QQE with yield curve control’ policy unchanged throughout 2018.”

Key Quotes: 

“Bank of Japan (BoJ) tweaked the QQE purchases slightly at the beginning of January, now buying JPY10bn less Japanese government bonds (JGBs) in the 10-25 year and the 25-40 year segment. This is still within the preannounced interval and a minor detail, we would say. Even so, markets had a pretty strong reaction on the announcement on 9 January, sending USD/JPY down about 0.5 percent and long rates higher.”

“In case of an upward pressure on rates, we still expect the BoJ to announce a fixed price JGB purchase operation, saying it will buy an unlimited amount of 5-10yr JGBs at 0.11%. In 2017, the BoJ announced such operations twice: on 3 February and 7 July.”

“Kuroda's term as governor ends in April and his two deputies Iwata and Nakaso in March. PM Abe has made no decisions on whether Kuroda will get another term, which we consider to be the most plausible outcome. As late as 16 January, Finance Minister Taro Aso stated that he appreciated Kuroda's efforts towards achieving the inflation target.”

“In our view, a policy tightening would strengthen the yen, and potentially derail the economic upturn, and as long as we are not seeing any pickup in core inflation and long global yields remain relatively low we believe any tightening will be too soon. For the first time in 14 policy meetings including an outlook report, the BoJ might not revise down its inflation forecast. Nonetheless, we think it remains overly optimistic and it will probably have to during the year.”

“We do not expect the BoJ to be close to tightening yet. But we will be listening closely whether Kuroda will comment on the current de facto tapering. In our main scenario, we still expect him to be reappointed and we expect the BoJ to keep its current ‘QQE with yield curve control’ policy unchanged throughout 2018.”