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Bank of Japan (BoJ) preview: quarterly report on prices and growth as key highlight



The Bank of Japan is set to hold their monetary meeting across 17 – 18 January 2022, with the meeting bringing about its latest outlook on growth and inflation.

Bank of Japan
Source: Bloomberg

Policy tools to remain unchanged, but outlook will be in focus

The upcoming meeting is largely expected to see the Bank of Japan (BOJ) keeping its current policy stance unchanged. This includes keeping in place its target of -0.1% for short-term rates and 0% for the 10-year bond yield, under its policy of negative interest rate policy (NIRP) and yield curve control (YCC). This comes as the country faces a fresh wave of virus resurgences, seemingly on track to surpass its virus peak in August last year.

With Japan extending most border restrictions until end of February to tackle virus spreads, a step away from its accommodative stance seems unlikely and the BOJ has the room to exercise patience in its policy settings with inflation still way below its target. Its latest core consumer price index (CPI) figure pointed to a 0.5% increase year-on-year (YoY), compared to the central bank's goal of 2%.

The focus for the upcoming meeting will instead lie on its latest outlook report, with fresh updates on growth and inflation expectations. While the economy continues to be on the path of recovery, global supply chain disruptions and a resurgence in Covid-19 pandemic cases pose near-term downside risks to its fiscal 2021 growth outlook. That said, any downward revision may likely be offset by an upward revision into fiscal 2022, with Japan PM Fumio Kishida’s upcoming fiscal stimulus package expected to provide some support for growth ahead.

With the large divergence between the firms’ costs and consumer prices, further cost pass-through to consumers may also likely lead to an upward revision to inflation forecast. For now, this may still seem to be positive for Japan by pulling away from its previous struggle with deflation and the absence of any significant jump near the 2% mark may likely bring about little surprise.


Japan's PPI vs core CPI
Source: Statistics Bureau of Japan


With global central banks increasingly shifting towards policy normalisation, any longer-term policy outlook guidance from the BOJ will also be on watch. While its accommodative policy is largely expected to remain near-term, the BOJ has increasingly taken some steps towards normalisation. The previous meeting saw the central bank revealing plans to scale back its purchases of corporate bonds and commercial paper after the March 2022 timeline. Recent reports suggest that there may be some discussions between policymakers on how soon they can start telegraphing an eventual interest rate hike.

With markets riding on the belief that the BOJ may keep rates unchanged until inflation nears 2%, any hints from the BOJ meeting which challenge this view may provide a positive surprise for the yen by suggesting that the markets may have been underestimating the shift in the BOJ’s stance.

Japan 225 riding on some cautious mood

On the four-hour chart, an upward trendline seems to be serving as a support line for Japan 225 index, having held prices up on at least five previous occasions. That may seem to put the 28,000 level on watch. Recent bottoms are also met with higher lows on the moving average convergence divergence (MACD) indicator, suggesting that prices may attempt to go higher in the near-term. That said, the longer-term movement remains uncertain for now, considering that the index has been largely trading within a consolidation pattern since January last year. Any upside ahead may potentially face resistance at the 28,800, where prices failed to break above in two occasions over the past week.


Japan 225 Cash
Source: IG charts

USD/JPY seeing recent downward pressure

The USD/JPY has pulled back from its recent higher highs, with a bearish MACD crossover suggesting near-term momentum to the downside. Past instances seem to suggest that USD/JPY movement may be driven by external factors, with a lesser extent coming from the BoJ meeting.

Despite Federal Reserve (Fed) officials supporting a tighter monetary policy and US CPI at its highest level in nearly 40 years, the US dollar has been seeing some selling pressure, with market expectations having largely priced for a March’s Fed rate hike and overall three to four hikes through 2022. That said, continued climbs in the US Treasury yields may be a catalyst to limit further downside for US dollar, with the 113.10 level on watch as potential support for the USD/JPY pair.


Source: IG charts
Yeap Jun Rong | Market Strategist, Singapore
17 January 2022

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