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Bank of Japan (BoJ) preview: Views split on upcoming BoJ policy move



Recent data has laid the grounds for some speculations for an end to its NIRP as soon as the upcoming meeting, with the odds of a March rate move now seen as almost a coin flip.

Bank of JapanSource: Bloomberg

Written by: Yeap Jun Rong | Market Strategist, Singapore
Publication date: 

What to expect at the upcoming Bank of Japan (BoJ) meeting?

At the previous meeting, the BoJ discussed the possibility of exiting from its negative interest rate policy (NIRP), with growing views among policymakers that the wage and inflation conditions for a policy pivot have ‘increasingly been met’. Since then, economic data has further validated the BoJ’s stance, with markets witnessing higher-than-expected Japan’s wage growth for January (2.0% versus 1.3% consensus), while Japan’s economy managed to skirt a technical recession in its updated 4Q gross domestic product (GDP).

That has laid the grounds for some speculations for an end to its NIRP as soon as the upcoming meeting, with the odds of a March rate move now seen as almost a coin flip. This suggests that either outcome from the BoJ meeting next week may likely trigger a huge wave of volatility for both the JPY and the Nikkei, as divided rate expectations realign.

Any policy inaction or indication of little urgency from the BoJ could suggest that markets have gotten ahead of themselves, which may tame hawkish rate bets and potentially weigh on the JPY. But given that policy normalisation remains a story of when and not if, any near-term pullback could still be a temporary move. The Nikkei has also seen an outsized downside reaction to any slightest hint of a policy pivot lately, declining by more than 5% over the past week. With that, any delayed unwinding of the BoJ’s ultra-accommodative policy settings will be well-received by equity investors, at least in the near term.



BoJ rate probability distributionSource: Refinitiv, as of 12 March 2024.


BoJ Governor’s language, policy guidance on close watch as well

Economic projections from the BoJ will be absent at the upcoming meeting, which will leave rate expectations highly sensitive to the Governor’s language at the press conference. His latest comments have offered mixed views by acknowledging that the economy was recovering but weak consumption remains a concern, which will leave markets seeking for more clarity on how the BoJ sees current economic climate.

Focus will also be on how policymakers will address its current yield curve control policy, although subdued moves in the 10-year Japanese government bonds (JGB) VIX seems to suggest little surprise being priced for the upcoming meeting.

The BoJ has also previously emphasised the importance of the spring wage negotiations (Shunto) in its policy thinking and preliminary data has been encouraging thus far. Unions demanded average wage increase of 5.85% versus 4.5% last year, the highest in 30 years. Along with Japan’s core inflation touching the BoJ's 2% target in January, how all of these will feed into the BoJ’s conditions of ‘sustainable and stable inflation, accompanied by wage increases’ will be sought.

USD/JPY: Near-term bearish bias remain

Recent narrowing in the US-Japan bond yield differentials has pushed the USD/JPY to its one-month low, following a brief consolidation around its key psychological 150.00 level. A switch to near-term bearish momentum seems to be in place, with the daily relative strength index (RSI) dipping below the key 50 level for the first time this year, while its daily moving average convergence/divergence (MACD) eyes for a potential cross into negative territory.

Since its January 2023 low, retracements in the USD/JPY within its broader upward trend has been met with retracements at the 50% or 76.4% Fibonacci levels. Therefore, given recent retracement, potential support to watch may be at the 145.54 level, where a 50 % Fibonacci retracement level coincides with the lower edge of its daily Ichimoku cloud support.


US-Japan 10 year bond-yield differentialsSource: TradingView
USD/JPY MiniSource: IG charts


Nikkei 225: Dipped to two-week low as hawkish bets brew

The Nikkei 225 has come under some downward pressure lately, as speculations brew for a quicker BoJ’s stimulus exit. The index has dipped more than 5% to its two-week low, although one may note that it is still up more than 16% year-to-date. For now, its daily RSI is back to retest its key 50 level for the first time since January this year, which may have to see some defending from buyers.

Ahead, immediate support to watch may potentially be at the 38,200 level, where a 23.6% Fibonacci retracement level stands. The broader upward trend may remain, with the index still trading above its daily Ichimoku cloud support, along with various moving averages (50-day, 100-day, 200-day).


Japan 225Source: IG charts



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