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Bank of Japan (BoJ) is Expected to Announce Interest Rate Policy Results and Yield Curve Control (YCC) Policy Today, October 31, 2023
As the BoJ policy announcement approaches, the Japanese Yen (JPY) has strengthened against the US Dollar (USD), after previously weakening below the significant level of 150.00 last week. This figure is a level that triggers the attention of Japanese policymakers to intervene in the bond market.
Although Japan's inflation has exceeded the 2% price target for 19 consecutive months, and government bond yields (JGB) remain at their highest level in a decade, the market does not expect any surprises from the BoJ.
Expectations Regarding Bank of Japan Policy and Its Impact on USD/JPY
Following the monetary policy review meeting in October on Tuesday, the Bank of Japan is expected to maintain its current policy without any adjustments. They will continue to hold the target interest rate and 10-year JGB yield at -10bps and 0.00%, respectively.
Before the BoJ's policy announcement, the central bank intervened in the bond market for the sixth time this month to contain the rising JGB yields. This intervention occurred as US bond yields sharply rose to their highest level in 16 years, with 10-year Treasury yields even surpassing the significant 5.0% level last Monday.
The benchmark 10-year JGB yield is approaching 0.86%, reaching its highest level since July 2013. The ongoing rise in JGB yields has led the BoJ to begin considering the possibility of additional easing in the Yield Curve Control (YCC) policy at the October policy meeting.
This was reported by Reuters, citing sources within the central bank. The BoJ had previously surprised the market by raising the 10-year yield cap from 0.50% to 1.0% on July 28.
One of the concerns for the Bank of Japan is the high inflation rate, which has remained above the bank's target for more than a year. The Tokyo Core Consumer Price Index (CPI), which is of particular concern to the BoJ, increased by 2.7% in October compared to the previous year, up from a 2.5% increase in September. Meanwhile, the core index, excluding fresh food and energy, also rose by 3.8%.
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In this context of high inflation, three individuals knowledgeable about the situation stated earlier this month that the BoJ plans to raise its core consumer inflation forecast to around 3.0% for the year ending in March 2024.
This is an increase from the previous forecast of 2.5% announced in July. Additionally, the government is also expected to raise its projection for 2024 from the current figure of 1.9% to 2.0% or more, as reported by Reuters.
Analysts at BBH noted, "The macro forecast update will be a key factor. Reports indicate that the Bank of Japan is likely to revise its core inflation forecast upward in this meeting. The forecast for fiscal year 2023 is likely to approach 3.0% compared to the previous forecast of 2.5% announced in July.
Meanwhile, the forecast for fiscal year 2024 is likely to reach 2.0% or more, compared to the figure of 1.9% seen in July. Projections for fiscal years 2024 and 2025 will be crucial, as if these figures exceed 2%, it would indicate that the bank is likely to begin reducing accommodative policies in early 2024."
The BoJ still has a chance to raise the inflation forecast, allowing it to maintain a very accommodative monetary policy. However, this also increases pressure on the central bank to raise the yield cap beyond the current 1.0%.
Nevertheless, the BoJ may proceed cautiously as policymakers continue to evaluate various factors that must be considered as they transition from a very accommodative policy. They seem to be patient in waiting for consistent achievement of their targets.
According to a summary of views expressed in the BoJ meeting in September, one board member stated that the second half of the fiscal year ending in March 2024 would be a "critical period" in determining whether the BoJ's price target can be achieved.
According to a survey conducted by Reuters of economists, nearly 80% expect the BoJ to abandon the 10-year yield control framework by the end of 2024. The majority also expect the central bank to end its negative interest rate policy (NIRP) next year.
Warning!
This analysis is based on fundamental and technical perspectives from reliable sources and does not constitute advice or solicitation. Always remember that this content aims to enrich readers' information. Always conduct your own research regarding other forex information as a reference for your trading.
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