BOJ decision preview: Putting dovishness in perspective

The Bank of Japan will announce its last rate decision of 2018 on Thursday, December 20th, late in the Asian session. Governor Haruhiko Kuroda will hold a press conference early in the European session. There are no set times for BOJ decisions.

No change is expected in the BOJ's ultra-loose monetary policy.

Ahead of all the rest

The Tokyo-based central bank has the loosest monetary policy in the developed world. The interest rate is at -0.10%, a negative rate. In addition, the BOJ pledged to maintain a low long-term interest rate by holding the 10-year yield close to 0%.

Japan suffered from a "lost decade" and then another one. It had extremely low interest rates well before the Global Financial Crisis of 2008 and also began Quantitative Easing ahead of everybody else. Kuroda entered office in April 2013 in introduced the large-scale QQE program. The Bank's balance sheet grew quickly and the Yen fell. A second iteration of the program and consequent tweaks all contributed to a positive rate of inflation and a victory over deflation.

Nevertheless, core inflation remains at around 1%, far from the 2% goal set by the government. The last significant change was to set the 10-year yield target in September 2016. Minor tweaks to the policy announced since then have not changed the picture of ultra-loose monetary policy.

Balance sheet > GDP

Back in November, the BOJ's balance sheet topped the nation's GDP, making it a first among G-7 nations. Japan is the world's third-largest economy. 

Kuroda was reappointed to a second term in April this year despite not having achieved the target. With an aging population and no significant reforms, it is hard to put the blame solely on the shoulders of the Governor. 

Even without any change in policy, the BOJ stands out.

After the Fed

The Japanse decision is due some less than half a day after the American one. The Fed is set to raise rates but will probably downgrade expectations for 2019. The speculation ranges from no moves at all to a total of three, as the Fed's September dot-plot indicated. 

Any downgrade by the FOMC will be considered a "dovish hike." The BOJ will provide a bit of proportion to what dovishness means. Kuroda and co. seem far not only from rate hikes but also from ending QQE. The Fed is already squeezing its balance sheet.

What we can expect

So if no change is expected, which is the usual business for the Bank, what can we expect? As this is the final event of the year, Kuroda may broaden the scope of his outlook in the final press conference for the year. 

The Governor once said that perhaps Fiscal Year 2019, which begins in April next year, might be a good time to begin withdrawing monetary stimulus, upon the right conditions. 

These conditions, of rising inflation, have not been met. Will he surprise with a similar statement this time? In this case, the Yen could react positively, with USD/JPY. However, those words seemed like a gaffe, and it is highly unlikely that we will hear anything resembling those words.

Back in September, Prime Minister Shinzo Abe said that loose monetary policy is not forever. His words came ahead of a leadership challenge in his own party, which he won easily. Kuroda did not respond to this call and Abe did not repeat it.

Conclusion

The BOJ is set to leave its policy unchanged at the last meeting of 2018. The ultra-loose monetary policy enacted by Kuroda and co. puts any dovish Fed hike in proportions. Any hint of a change in policy may send USD/JPY lower, but the chances are very low.