BOJ Seen Sitting Tight After Fed Rate Cut: Decision-Day Guide

(Bloomberg) -- The Bank of Japan is expected to stand pat on policy just hours after an expected interest rate cut by the Federal Reserve, with recent stability in financial markets relieving some of the pressure on Japan’s central bank to follow suit.

About three quarters of 48 economists see the BOJ leaving interest rates and asset purchases unchanged at the conclusion of a two-day meeting Thursday, according to a Bloomberg survey.

Still, investors remain on high alert after Governor Haruhiko Kuroda said the bank was “more positive” about adding to its stimulus at the July meeting and flagged his willingness to consider lowering the BOJ’s negative short-term rate if necessary to support the economy and prices.

While it’s become clearer since the last meeting in July that U.S.-China trade tensions and slowing global growth are weighing increasingly on Japan’s exporters and manufacturers, economists still believe the BOJ is loathe to take further action unless absolutely necessary given the side effects of its stimulus program.

A softening of the yen despite renewed easing action by the European Central Bank and an uptick in long-term bond yields have relieved some of the market pressure on the bank to act. With the dollar at more than 108 against the yen, BOJ policy makers are far from the 100 mark that economists see as a line in the sand for action.

The Fed decision could still be a wild card in the calculations of Kuroda’s policy board if a surprise move upsets markets.

Steeper Shape

Another key focus for investors is the BOJ’s view on the yield curve. Yields strayed below a loose trading range permitted by the BOJ for a large portion of the time since the July meeting. While they have returned to within the 0.2 percentage point trading band around zero, some officials saw yield levels that touched -0.295% earlier this month as close to a point requiring action, according to people familiar with the matter.

The BOJ usually ends its policy meeting in the early afternoon, followed by a press conference by Kuroda at 3:30 p.m.

What Bloomberg’s Economist Says

“The cost of any big changes to policy outweigh the benefits. We expect it to stand its ground -- keeping its main policy levers unchanged but potentially adding some flexibility to how it manages rapid changes in yields.”

Yuki Masujima, economist

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What to Look for

• JPMorgan and Morgan Stanley are among those flagging the possibility of the BOJ deepening its negative rate as early as this meeting. With low expectations for a change in September, another Kuroda surprise could weaken the yen significantly.
• Bond traders will closely watch for any signals that the BOJ is comfortable with lower yields after a global bond rally exposed the difficulties of keeping yields in the central bank’s trading range. Widening the range is another option for the BOJ.
• Any comments Kuroda makes on the yields of super-long bonds will also attract close attention. The bank concluded that a flat range of interest rates could eventually harm the economy in 2016 when the yield curve-control program was introduced. Super-long yields have been low for a while so the need for a change is seen to be growing.
• Kuroda is likely to be asked whether the bank still believes the global economy will pick up in the second half of this year. A change to the BOJ’s base scenario could increase the possibility of easing action to come.
• Kuroda’s comments on the output gap and inflation expectations will be closely monitored. Both are factors he has cited to ascertain the risks for price momentum. A loss of momentum would be a key factor to prompt more action.

Policy Recap

• Pledge to keep interest rates extremely low until at least around spring of 2020.
• A rate of -0.1% on some reserves financial institutions keep at the central bank.
• Yield target of about 0% for 10-year Japanese government bonds, with a trading range of about 0.2 percentage point on either side of the mark.
• A target of increasing JGB holdings by about 80 trillion yen ($739 billion) a year is now secondary to controlling interest rates. The actual pace of purchases has fallen to well below half that rate.
• A guideline to increase holdings of exchange-traded funds by 6 trillion yen a year. Actual purchases vary widely from month to month, depending on market conditions.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net;Sumio Ito in Tokyo at sito58@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Paul Jackson, Henry Hoenig

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