BoJ seen ‘on hold’ the rest of the year – UOB

FX Strategists at UOB Group believe the BoJ will keep its monetary stance on hold for the rest of the current year.

Key Quotes

“Even as monetary policy bias has turned hawkish for several G10 central banks, we think that it remains premature to even expect the BOJ to talk about tapering its easing program anytime soon, because Japan is still far away from its 2% inflation target. Chances are it may be well below 2% even when BOJ Governor Kuroda’s term expires in April 2018 (although it seems that Kuroda is now in pole position to be re-appointed as BOJ Governor)”.

“And while BOJ’s yield curve control ran into difficulty in early 3Q as the 10-year JGB yield breached +0.1% in early July, subsequent risk aversion due to geo-political development led to a surge in safe haven demand, sending 10-year yield back below zero% briefly in early Sep and now it is at 0.036% (as of 21 Sep). Thus it seems that BOJ will hold to its yield curve control parameters for now and likely to refrain from any explicit discussion of tapering its ultra-expansionary monetary policy”.

“After Sep’s policy decision of no change, we expect status quo to be maintained in the next 6 months although we still factor in a small probability for more BOJ policy easing especially if there is significant deterioration to the inflation outlook. But we highly doubt what BOJ can achieve for inflation. Domestically, speculation is rife that PM Abe may call for snap election in 4Q 2017 and there are concerns he may pledge to push ahead with the sales tax hike to 10% in October 2019 from the current 8% but delay or drop the 2020 target to achieve the primary budget balance/surplus. And that may complicate BOJ decision making which is premised on the government’s pledge to get its fiscal house in order”.

“The next MPM will be on 30/31 October and it will be an important policy meeting for BOJ as it is accompanied an updated report on its Outlook for Economic Activity and Prices (The Bank's View). The key data to watch for Japan are the August CPI and a flood of economic data coming out at the same time on 29 Sep (Friday) while Japan’s prelim 3Q 2017 GDP will only be released much later on 15 November”.