BOJ Preview: As Low a Risk Event as it Gets

The Bank of Japan (BoJ) is widely expected to maintain its policy stance unchanged at its meeting ending on Sept 21st, including its ‘QQE with yield curve control’. In fact, in the latest Bloomberg survey (8-13 September), none of the economists expect policy to change this week. While there is always a need to re-evaluate new policy inputs in each meeting, the outlook for the BoJ to make any significant changes to its policy in the next 6-12 months horizon is fairly low. 

From bad to worse for volatility seekers 

To put things into perspective, announcements in policy changes by the Bank of Japan have become less and less frequent ever since the introduction of its YCC (Yield Curve Control), as the focus got diverted towards the implementation of JGB purchase operations to stabilize the curve. So radicals have been the steps taken to reduce market volatility, that the BoJ has essentially been one full year without announcing further policy changes since the introduction of the YCC one year ago. As one may anticipate, the volatility post BoJ meetings across FX, rates, and equities has been greatly reduced. At present, the BoJ meeting is currently perceived as one of the lowest risk events out of all G10 Central Banks, completely detached from the rest of more proactive tightening policies or less dovish (ECB) seen elsewhere. 

GDP firms up in Q2, but CPI nowhere near target

When dissecting the state of affairs, we find a Japanese economy with an activity in Q2 that has been on the rise - GDP grew at an annualized rate of 2.5% -. Inflation readings have also been picking up this year, although it has been mainly driven by rising energy prices vs underlying price pressures, which remain tepid even as growth solidifies and the output gap narrows. The 2% inflation goal by the BoJ is therefore still nowhere near and as varies surveys indicate, medium-term inflation expectations based on economist forecasts don't paint a much rosier picture. This factor alone cements the idea that BoJ's accommodative policy is here to stay through 2018. 

New board members to lead to an unanimous vote?

A topic of interest this week will be the changes in the vote composition after new board members joined the committee. The 20-21 September meeting will be the first for the two new board members, Hitoshi Suzuki and Goshi Kataoka, who happen to replace the two frequent dissenters on the board, Takahide Kiuchi and Takehiro Sato after their 5-year tenure ended in July. 

As an early spoiler, one should be reminded that at their first press conference, both Suzuki and Kataoka suggested that it is too premature to consider an exit strategy to the current easing. As mentioned, since the two retired members had been dissenters, the risk for a unanimous vote to ease is quite high. The implications for the Yen should be limited, although it would reinforce the notion that we are under the leadership of a strongly dovish committee. 

Will Kuroda extend his term as Governor?

Another focal point, not necessarily in this week's meeting as the decision is not due until year-end, will be who gets elected as the next BoJ governor. Should Kuroda, whose term concludes in April 2018, be offered a 5-year extension, or will a new face sit at the helm of the Japanese Central Bank According to Nomura's Economics Team, "we still think it is most likely that Koruda will be reappointed." However, the bank does not rule out that uncertainty "could create some volatility and induce JPY appreciation pressure, as the nomination of another candidate could be viewed as a signal that the government is expecting the BoJ to exit its current monetary policy."

YCC marks its first year anniversary

One of the aspects that should have the most impact on the valuation of the Yen is any new details or comments with regards to the guidelines for JGB purchase operations. As a reminder, this week's meeting marks the first anniversary of the BoJ's YCC (Yield Curve Control). However, as the title indicates, there will be no fireworks. Despite the amount of JGB purchases per operation has slowed from the initial 80 trillion yen guidance to currently stand circa JPY60trn, Governor Kuroda said that the decrease in market operations should be seen as an adjustment to falling liquidity, which makes it less demanding for the Bank to control the curve. 

While not expecting the Bank to change its “around JPY80trn” guideline, Nomura notes that "according to a Bloomberg survey, five out of 45 (11%) economists expect a change in the guideline in October, so Governor Kuroda’s view on the guideline at the press conference will be important." It has certainly been easier for the BoJ to manage the yield curve, which explains why there is a small percentage of economists expecting a possible guideline change. However, altering the amount initially committed, may backfire and create unnecessary volatility. 

Look elsewhere if you are after volatility

To conclude, as the macro environment stands, we are at a time in which geopolitical and US fundamentals headlines (North Korea and US tax cuts at the forefront) have the ability to influence Yen valuations to a much greater degree than what the BoJ is currently capable of, given its successful plan to have reduced market volatility ever since the introduction of YCC.