Bank of Japan Preview: New governor but old policy

It’s an end of an era for the Bank of Japan (BoJ), as new Governor Kazuo Ueda takes the helm during the two-day April monetary policy review meeting, ending this Friday, April 28. The policy decision will be announced at around 03:00 GMT, followed by Ueda’s press conference at 06:30 GMT.

No fireworks expected

Former Governor Haruhiko Kuroda bid adieu without any changes to the monetary policy settings at his last policy meeting in March. The new chief, Ueda, has already squashed expectations of any changes to the interest rates and the yield curve control (YCC) policy during his appearances earlier this week, leaving no room for surprises.

While speaking in the Japanese parliament on Monday, Governor Ueda said, "if it can be foreseen that trend inflation will reach 2%, BoJ must head toward policy normalization."

On Tuesday, Ueda said that the “trend inflation remains below 2% but gradually accelerating, which is partly due to the effect of monetary easing.”

Japan’s Core-Core Consumer Price (CPI), an index stripping out the effect of both fresh food and energy, which is closely watched by the BOJ as a better gauge of underlying price trends, rose 3.8% in March from February's 3.5%, accelerating for the tenth straight month.

According to the latest BoJ data released on Tuesday, the Services Producer Price Index, which measures the prices companies charge each other for services, rose 1.8% in fiscal 2022 vs. a 1.2% increase in the previous fiscal year. The data came after top Japanese firms agreed to their largest wage hikes by 3.8% for the coming fiscal year in a quarter century in annual labor ‘shunto’ talks with unions held in March.

The elevated inflationary pressure supports expectations that the Japanese central bank could begin to phase out a massive stimulus programme in the coming months.

Governor Ueda, however, expressed his concerns that “tightening policy now could push down inflation in the future, which is already likely to slow on the dissipating effect of import costs.”

“We see the risk of inflation undershooting forecast as bigger than the risk of overshooting, which is why BoJ must maintain easy policy now,” the Governor added.

As against some market expectations, no tweaks to Japan's yield curve control policy are also anticipated, as Ueda noted that the “yield curve is now smooth. It is reasonable to continue easing with YCC.”

Therefore, the focus will be on the central bank’s BOJ's quarterly outlook report due after the meeting, which will include new growth and inflation forecasts. The inflation forecasts extending through fiscal 2025 will be closely scrutinized to gauge the timing of the BoJ doing away with its negative interest rates.

Meanwhile, any debate on the YCC change is unlikely to be seen until the June or July policy meeting. According to the latest forecast of Nippon Life Insurance Co., Japan’s largest insurance company, the Bank of Japan will adjust the YCC policy in June this year.

Governor Ueda could, however, announce undertaking a review of the policy assessments adopted over the past few decades at the meeting to study the causes of Japan's economic stagnation, as reported by the Japanese media on Sunday. The review could allow Ueda to propose effective policies in the future.

USD/JPY probable scenarios

USD/JPY is trading in weekly lows near 133.50 heading into the Bank of Japan policy showdown, the first for Governor Ueda. The Japanese yen resumed its correction from five-week lows against the US Dollar amid the renewed US banking sector jitters-induced risk aversion.

However, it remains to be seen if the USD/JPY pair can sustain the downside ahead of Thursday’s US advance Gross Domestic Product (GDP) for the first quarter and Friday’s BoJ policy announcements.

The slightest revision to the central bank’s YCC policy could raise expectations that Ueda could withdraw its ultra-loose policy sooner than expected, triggering a fresh buying wave in the Yen, which could smash USD/JPY toward 130.00.

In the case of a status quo maintained by Ueda, the Japanese yen could see a big unwind of this week’s long trades, driving USD/JPY back toward the multi-week top of 135.14, set on April 19.

Ueda’s words, during his post-policy meeting press conference, will be also closely scrutinized for fresh signals on the bank’s future policy course.