Weak data and rising Yen raise scope for further policy easing from BoJ at April 27-28 meet

Bank of Japan will hold its two day monetary policy meeting on 27-28 April where it is expected to decide policy rate and update forecasts inflation and growth figures. Reuters poll shows 8 out of 16 analysts feel that the BOJ will take easing steps at 27-28 April meeting. JGBs gained on Friday amid weak industrial production and expectation of further policy easing from BoJ.

Data released earlier today showed that Japanese industrial production in February plunged 5.2 pct y/y, as compared to 6.2 pct in January. On annually basis, it fell 1.2 pct, from prior down 1.5 pct. Similarly, February capacity utilization tumbled -5.4 pct, from -2.6% in January.

The BoJ has been severely challenged recently by a sharp appreciation of the JPY which clearly works against the BoJ’s objective to get inflation higher. With data being on the soft side and wage negotiations pointing to slowing wage growth, the BoJ is in a pinch and will likely take action at the meeting on 28 April.

"We look for a rate cut of 20bp to -0.3%. This is more than the market is pricing in and we believe that this would stabilise USD/JPY and expect it to recover gradually as we also look for higher US short yields to help weaken the JPY in the medium term." said Danske Bank in a report.