BoJ Preview: Forecasts from eight major banks, no rush to normalize monetary policy

The Bank of Japan (BoJ) will announce its monetary policy decision on Wednesday, January 18 at 03:00 GMT and as we get closer to the release time, here are the expectations forecast by the economists and researchers of eight major banks. 

Back in December, the central bank introduced a change to its Yield Curve Control (YCC), lifting the ceiling of what the 10-year note could offer from 0.25% to 0.50%. A hike this week seems unlikely as the BoJ is set to leave its policy unchanged.

Standard Chartered

“We expect the BoJ to keep both the policy balance rate and the 10Y yield target unchanged at -0.1% and 0%, respectively. We believe policymakers will assess the potential impact of the recent decision to widen the 10-year JGB band to +/-50 bps (from +/-25 bps) at its December meeting. Local media reports suggest that policymakers will be looking to review the side effects of current ultra-easy monetary policy and potential risks following the BoJ’s December move. This has likely raised concern among policymakers that unwinding of the negative interest rate policy may result in unintended consequences and risk financial market instability.”

 ING

“The BoJ is expected to stand pat after delivering its unexpected decision in December to expand the yield curve band. Governor Haruhiko Kuroda’s future guidance will remain dovish, but apart from that, the market appears to be pricing in additional normalisation steps from the next BoJ governor.”

TDS

“We expect a further widening of the YCC band by another 25 bps at this meeting, and if not now, at the March meeting. Market functioning has not improved as reflected in large unscheduled bond-buying operations. Additionally, there are growing signs of broadening inflation pressures. At the very least we expect the BoJ to revise its inflation forecasts higher.”

SocGen

“Our main scenario for the BoJ is still no change to the YCC policy, but the risk for some changes has risen quickly. We see 25% chance of BoJ scrapping JGB purchase limitation and increasing the types of bonds, and 25% chance of a wider band of ±75 bps for the 10-year yield. What would make BoJ’s job harder is that core CPI likely accelerated again in December to 4%, owing to broad-based inflationary pressure.”

Danske Bank

“Despite some speculations, consensus expects no changes in monetary policy this week, but even if the BoJ was to surprise the market, we think market reactions this time would be more muted.”

Deutsche Bank

“We expect no change in policy (even if we feel there are risks they will) but believe the associated Outlook Report will show an upgrade to the bank's inflation forecast to around 2% for 2022-2024. We expect the BoJ to abandon YCC by the end of Q2 this year, amid forces such as the ‘shunto’ spring wage negotiation, a positive output gap and leadership changes at the bank. If they do change the YCC guidelines this week, we think that another 25 bps widening of the band would be worth around 10 bps on 10yr USTs immediately. The eventual end of YCC would lead to a more substantial and permanent shift in term premium but this will take time.”

Citibank

“We expect YCC to be abolished. The BoJ decided on an unexpected policy change (i.e., widening of the target range for 10-year JGB yields) in December, but 10-year JGB yields have already stuck at the upper limit of the new range of +0.5%, resulting in renewed distortion in the yield curve. Even if the range is widened again, it is unlikely that the distortion of the yield curve will be fundamentally addressed. Moreover, comparing the impact of abolishing YCC under President Kuroda and under the next governor, the former would cause less damage to the organization.” 

Wells Fargo

“Recall that in December of last year, the BoJ surprised market participants by adjusting its YCC policy, widening the tolerance band for the 10-year Japanese government bond (JGB) yield to +/- 50 bps (instead of +/- 25 bps) around a target of zero percent. Despite the policy tweak, Governor Kuroda asserted that the change in policy was not a form of monetary tightening, but a move to improve JGB market functioning. While this adjustment has added uncertainty to the outlook and has increased the likelihood of another policy change, we do not expect the BoJ to adjust monetary policy at its January meeting.”