BOJ monetary policy preview

Bank of Japan (BOJ) will announce its monetary policy decisions tomorrow sometime in early Asian hours, probably around 3:00 GMT, followed by press conference from Kuroda.

Current monetary policy 

• At last meeting Bank of Japan (BOJ) unexpectedly reduced rates to -0.1% and as of now BOJ is pursuing a tiered system for rates.
• It is also pursuing monetary easing through asset purchase (Govt. Bonds, ETFs,REITs) since 2012 and has increased the pace of purchase to ¥ 80 trillion per annum in October, 2014.
• In December, 2015 BOJ announced it will be additionally purchasing ¥300 billion in equities and increase the duration of the bond portfolio to 10-12 years.
• This massive rate of purchase has pushed Central bank’s balance sheet to record high which is a major concern in GOJ (Government of Japan) bond market.

Policy expectation and possibilities 

• After last times backfiring of negative rates we expect Bank of Japan (BOJ) to stay away from introducing further monetary stimulus. However it is more likely that it will try to talk down the yen.
• Moreover, policymakers will be willing to keep powder dry and watch out how recent yen strength plays out.

Division among policymakers 

• BOJ board remains heavily divided. Last action to reduce rates to negative came with 5 member voting in favor while 4 opposed.

• BOJ policymakers Mr. Kiuchi has been constantly voting in favor of reducing purchase in tune of 45 trillion Yen.

Impact on Yen?

• Yen is more likely to gain its direction from Broad based Dollar strength and risk aversion in the market, but if unexpected BOJ acts again, movement would depend on the policy tools used. Yen might drop if QE is introduced.
• Several key concerns for BOJ – Weakness in Emerging market, weak recovery in Japan, China’s slowdown, looming sales tax hike.

Yen is currently trading at 113.7 per Dollar and Nikkei at 17240.