BOJ Seen Waiting on Fed Before Any Action: Decision Day Guide

(Bloomberg) -- The Bank of Japan is widely expected to sit tight at its meeting on Tuesday as it waits to assess the impact of a looming Federal Reserve decision before considering any measures of its own.

Some 81% of 47 economists surveyed by Bloomberg see the BOJ sticking with its current policy settings at the meeting, while 19% predict additional easing. The meeting comes the day before the Fed is widely expected to cut U.S. interest rates for the first time in more than a decade.

While the vast majority of analysts think the BOJ will want to conserve its scarce firepower for now, a key focus will be the BOJ’s stance on future policy. Roughly a third of polled analysts expect the bank to strengthen its pledge to keep rates at extremely low levels at the meeting.

Last week the European Central Bank bolstered its guidance on policy to flag near-term action. The BOJ is unlikely to send such a strong signal, but it may extend its promise beyond the existing spring 2020 time frame.

Many economists expecting a guidance change by the BOJ say it needs to be seen doing something to avoid the risk of a sharp strengthening of the yen in response to the Fed. Other economists say the BOJ is better off waiting rather than making a move whose impact on markets could quickly be wiped out by the Fed or remarks by Chairman Jerome Powell.

Some BOJ officials see little to be gained from strengthening the guidance though they would accept a change if pressed at the meeting, according to people familiar with the matter.

The policy statement is usually released around noon, and will come with a quarterly economic outlook report. BOJ Governor Haruhiko Kuroda holds a press briefing at 3:30 p.m.

What Bloomberg Economists Say

“We think the BOJ will adopt a wait-and-see strategy ahead of the Federal Reserve’s decision on July 31... The BOJ’s latest growth and inflation outlook and any tweaks to its forward guidance will be a focus.”

Asia Economist Team
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What to Look for

• Investors are watching for any change in Kuroda’s view that the global economy should pick up later this year after he noted rising risks overseas earlier this month. Amid a global tide toward looser policy, 77% of economists forecast the BOJ’s next policy step will be additional easing, up from 62% last month.
• The BOJ will update its quarterly outlook for economic growth and inflation. Most analysts expect a lowering of its inflation projection for at least one of three years through fiscal 2021. The BOJ is likely to continue predicting it won’t meet the 2% inflation target until at least until early 2022.
• BOJ officials have bitter memories of leaving policy unchanged ahead of a key Fed meeting. In 2010 the BOJ had to convene an emergency meeting to prevent the yen from strengthening further after the Fed reversed its exit plans just hours after a BOJ decision to hold policy.
• The number of analysts forecasting an expansion of the trading range around the BOJ’s 10-year bond target this year has doubled to 30% over the last month. The yield touched a three-year low of -0.195% last month, close to the BOJ’s trading range boundary of 20 basis points from zero.
• With a history of BOJ surprises, economists are on high alert. Credit Suisse says it won’t rule out the introduction of a lending program with negative rates. Tokai Tokyo Research Center sees Kuroda possibly announcing a lower floor for the BOJ’s bond target.

Read more: BOJ Is Said Likely to Downgrade Inflation Forecast for This Year

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 zero% 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 ($736 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 reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

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

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