BOJ Preview: Kuroda could quietly encourage the Yen's fall in the QQE's 5-year anniversary

Why this meeting is important

The Bank of Japan meets to make its rate decision on Friday, April 27th. The event includes the release of the BOJ's quarterly report, thus allowing the Bank to shed more light on the state of the Japanese economy and the prospects for reaching its inflation target. This April meeting also marks the five year anniversary since Governor Haruhiko Kuroda began his tenure at the helm of the Bank. 

Back in April 2013, the Bank announced a massive bond-buying program called Quantitative and Qualitative Easing (QQE). The ultra-loose policy sent the Japanese Yen tumbling down, helping exporters and pushing inflation off the bottom. Since those days, the currency ebbed and flowed, and the BOJ added additional stimulus. However, annual core inflation has been able to move above the 1% area to the ever-elusive 2% goal.

What to expect

The BOJ currently pledges to keep 10-year yields around 0% and buys bonds accordingly. Also, the interest rate is -0.10%. The negative short-term interest rate and the push to keep long-term lending at low levels is likely to continue at this point.

The questions markets will be asking is: when will the BOJ begin withdrawing stimulus? The Federal Reserve is raising rates, and the ECB has reduced QE while the BOJ is keeping the pedal to the metal. In a public appearance earlier this year, Kuroda mentioned a potential exit starting in the Fiscal Year 2019 that begins in April next year. He later clarified his comments emphasizing the condition that inflation needs to reach its target. 

Any mention of tightening the monetary policy may strengthen the Yen. Also, the condition at which the BOJ begins is an open question: do they wait for inflation to reach the target or start exiting beforehand? As inflation is so far off the mark, the BOJ did not tackle this question. This may be the case also in this decision.

Another thing to watch is how the two new members: Masazumi Wakatabe and Masayoshi Amamiya join as deputies and may have an influence. This is the first decision where they will vote. They are not expected to sway the Bank in either direction. 

The role of the weaker Yen in the BOJ's decision

The recent fall of the Yen is undoubtedly welcomed by the BOJ as it helps in achieving the inflation target. The slide stems from higher US yields and also the hopes for peace in the Korean peninsula. North Korea's Leader Kim Jong-un and South Korea's President Moon Jae-in hold a historic meeting on the day of the BOJ decision. 

The more favorable conditions may allow the BOJ and Kuroda to talk more freely about removing stimulus. But will he go there? The answer is probably no. Kuroda may want to refrain from confusing and stick to the message that the BOJ will do all it can to reach the 2% target. 

Will Kuroda and co. refer to the better exchange rate? Japanese authorities usually complain about a stronger Yen but remain silent when it weakens. Nevertheless, Kuroda may be asked about the currency at the press conference. If he sees the exchange rate as too high, it may react with a drop. However, this has a low probability. If Kuroda says he is content with the current rate, the Japanese currency may rise.

However, the most likely scenario is that Kuroda smiles about the decision inside without making any comment. This will allow the other drivers of the currency to continue having their say.

Conclusion

The BOJ holds a more important rate decision as it includes the quarterly report, the five-year anniversary, and the new nominations. However, no change in policy is expected. Hints about a potential exit and any commentary about the Yen will be central to the market reaction.

More: JPY: Guided by BoJ? - Rabobank