BOJ Preview: Focus on outlook tweaks ahead of general election

• The Bank of Japan is unlikely to alter its monetary policy in October.
• The BOJ is seen cutting growth and price outlook ahead of the Oct 31 election.
• USD/JPY looks south but Governor Kuroda’s take on the yen holds the key.

Despite the recent depreciation in the yen and rising energy prices, the Bank of Japan (BOJ) is likely to maintain its monetary policy settings on Thursday, as it concludes its two-day monetary policy review meeting.

The central bank is expected to defy the global rate hike trend and stay on hold ahead of the House of Representatives election in Japan on Sunday and the US Federal Reserve's (Fed) monetary policy meeting next week.

BOJ to hold fire, slash price outlook

The BOJ will keep the benchmark policy rate on hold at -10bps while maintaining its pledge to buy J-REITS at an annual pace of up to JPY180 bln.

The massive stimulus measures will likely remain in place at the policy decision this week, as the BOJ diverges from other global central banks who are eyeing exits from crisis-mode easy policies.

Earlier this month, the central bank’s board member Asahi Noguchi, said that reducing monetary easing, as other central banks are preparing to do to cope with inflation, is "not an option" for the time being. The precondition for the BOJ to scale back stimulus is when the inflation rate solidifies above 2%, he added.

The central bank will publish an economic outlook report on Thursday with new forecasts for growth and inflation.

In the fresh quarterly projections, the BOJ is seen cutting this year's growth and inflation estimates following a very weak summer and the third quarter due to the coronavirus-induced lockdowns and supply chain crisis. However, the bank will stick to its forecast of a moderate recovery, Reuters reported, citing sources.

Even though the country’s inflation remains a distant dream from the BOJ’s 2% price target, soaring energy, raw material prices and the yen's weakness have emerged as sources of concern. These factors hurt the profits of the Japanese companies, who continue to shield consumers from increased costs amidst persistently weak domestic demand.

Governor Haruhiko’s comments on the yen weakness, therefore, will be closely followed during the post-monetary policy press conference held around 0630 GMT.

USD/JPY probable scenarios

USD/JPY is witnessing heavy selling pressure in the run-up to the US Durable Goods and BOJ showdown. A flight to safety coupled with a fresh downswing in US Treasury yields across the curve is weighing negatively on the spot.

The Fed-BOJ monetary policy divergence will continue to play out in favor of the US dollar in the coming months. However, the Japanese yen could likely extend the correction from multi-year lows of 114.69 against the greenback on the BOJ announcements. The prevalent market mood and the dynamics in the dollar and yields will also have a significant bearing on the major at the time of the BOJ decision.

Technically, the risks remain skewed to the downside for USD/JPY, especially after the price confirmed a symmetrical triangle breakdown on the four-hour chart, earlier on. The downside breakout opens floors towards the 113.00 level. Ahead of that psychological level, the ascending 100-Simple Moving Average (SMA) at 113.34 could offer some support to the buyers.

Should the BOJ fail to offer any hawkish hints with regards to the rollback of the pandemic stimulus, the currency pair could rebound towards critical resistance at 113.82, while the greenback extends its renewed upside. That level is the confluence of the 21-SMA and the triangle support. The next stop on USD/JPY’s road to recovery could be at the horizontal 50-SMA of 114.05.

The Relative Strength Index (RSI) points south below the central line, however, suggesting the path of least resistance for the spot appears to the downside.

USD/JPY four-hour chart