What to expect at the next Bank of Japan (BOJ) meeting as the yen plummets

The Japanese yen is near its weakest levels since 1998, and authorities have hinted that they will take steps to stem the currency’s decline.

Ahead of the Bank of Japan’s rate decision later this week, CNBC examines whether Japan’s central bank could abandon its ultra-loose monetary policy, as the Federal Reserve maintains its hawkish stance, signaling more aggressive rate hikes. coming.

The widening of the credit spread has led to a significant weakening of the yen, with the Japanese currency falling by around 25% since the start of the year.

Last week, the Bank of Japan reportedly carried out a currency “verification”, according to the Japanese newspaper Nikkei – a move widely seen as preparation for an official intervention.

The so-called control, as the Nikkei explained, involves the central bank “investigating trends in the foreign exchange market” and is widely seen as a precursor to physical intervention to defend the yen.

Despite talk of physical intervention in the currency markets, analysts point to another reason behind the yen’s weakening: the Bank of Japan’s Yield Curve Control (YCC) policy – a strategy that has was implemented in 2016, which caps the Japanese government for 10 years. bond yields around 0% and offers to buy unlimited JGBs to defend an implied cap of 0.25% around the target.

The yield curve control policy aims to bring inflation in Japan down to a target of 2%. On Tuesday, Japan announced that core inflation rose 2.8% from a year ago in August, the fastest growth in nearly eight years and the fifth consecutive month that inflation exceeded the BOJ target.

Joey Chew, senior Asian currency strategist at HSBC, said defending the policy would be the central bank’s priority instead of currency intervention, which would be decided by the Department of Finance and led by the Bank of Japan.

Talking about FX intervention at this stage may not have material impact. Even real intervention can only lead to a significant but short-lived reaction

Joey Chew

Senior Asia FX Strategist, HSBC

“The BOJ will make bond purchases – theoretically unlimited – to maintain its policy of yield curve control,” Chew told CNBC last week. He added that such monetary operations would be somewhat at odds with any potential currency action, given that selling dollars into yen would tighten the Japanese currency’s liquidity.

“Talking about an FX intervention at this point may not have a material impact,” Chew said. “Even real intervention can only lead to a significant but short-lived reaction.”

Chew pointed out the limitations of previous cases when Japan stepped in to defend its currency.

I wouldn't expect the Japanese yen to be

Nor do Goldman Sachs strategists see the central bank abandoning its policy of yield curve control, pointing the finger at hawkish global peers.

“Our economists expect the BOJ to firmly maintain its commitment to YCC policy at this week’s meeting amid five other G10 central banks all likely to make significant rate hikes.” , they said in a note earlier this week.

Goldman Sachs says that while direct intervention should be more likely with rate control reports, economists see the odds of a successful operation in defense of the yen as “even lower.”

End of Abenomics

Monetary policy changes by Japanese authorities are unlikely, with the odds particularly low under BOJ Governor Harukiho Kuroda, UBS’s chief economist for Japan, Masamichi Adachi, told CNBC last week. .

“One possibility they would deliver is to change his current neutral to soften forward guidance to just neutral or remove it,” he said, adding that the probability is at most 20% to 30%.

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According to Nomura, one of the first indicators of a change in monetary stance in Japan would be a move away from the economic policies of Prime Minister Fumio Kishida’s predecessor, Shinzo Abe, widely referred to as Abenomics.

“The first necessary step towards normalization would be for Prime Minister Kishida to show that his political priority has now moved away from Abenomics, and that he will not tolerate any further depreciation of the yen,” macro Naka Matsuzawa said last week. chief strategist for Japan at Nomura.

The Bank of Japan’s next two-day monetary policy meeting ends Thursday, a day after the meeting of the US Federal Open Market Committee, where officials are expected to raise interest rates another 75 basis points.

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