(Bloomberg) -- Bank of Japan Governor Kazuo Ueda will be under intense scrutiny Wednesday when he unveils his plans for quantitative tightening and delivers a decision on the policy interest rate, in actions that may rattle global financial markets.
Some 14 of 48 economists predict the BOJ’s board will raise its rate from the current range of 0 to 0.1%, while almost no one is ruling out the risk of such a move, according to a Bloomberg survey. As for QT, the bank will outline plans to reduce monthly bond buying over a one- to two-year horizon.
Hours after the BOJ meets, the US Federal Reserve is set to offer fresh signals over its prospects for cutting rates, creating a double-whammy of policy news that could potentially jolt the yen in either direction.
With the market having reached a general consensus on the BOJ’s likely pace of bond buying cuts, the focus will fall on interest rate policy. Some BOJ officials are open to the idea of raising rates as inflation moves in line with their forecasts, people familiar with the matter said earlier this month. Others see the central bank standing pat as an option as authorities await more data in hopes of confirming signs of a pickup in consumer spending, the people said.
In the run-up to the meeting, the yen has been volatile, moving from a 38-year low to a two-month high in a rally fueled by speculation that the gaping interest rate differential between Japan and the US is poised to narrow.
The BOJ usually releases its policy decision around noon, followed by a press briefing by Ueda at 3:30 p.m.
What Bloomberg Economic Says...
The Bank of Japan “will likely take two more big steps toward policy normalization – hiking rates again and starting to cut bond buying.”
— Taro Kimura, economist
Click here to read the full report.
Here is what to watch for:
- A rate hike would suggest Ueda may be more hawkish than most BOJ watchers have imagined until now, possibly generating market speculation that there will be another hike by year-end.
- The yen has made rapid gains against the dollar in recent weeks. Raising rates in July would let the BOJ argue that it isn’t beholden to weak yen moves in making its rates decision.
- The Ministry of Finance is suspected of having conducted back-to-back currency interventions earlier this month. In light of that, Ueda is expected to convey hawkish sentiments and hint at the possibility of an approaching rate increase even if he decides to stand pat on Wednesday.
- The market consensus is for the BOJ to cut bond purchases to about ¥5 trillion ($32.6 billion) per month from the current ¥6 trillion before ultimately halving the buying in two years. Any figures that significantly differ from these expectations could jolt the bond market.
- In the event of a rate hike, the bank risks being seen as having yielded to political pressure. Toshimitsu Motegi, secretary general of the ruling Liberal Democratic Party, and Taro Kono, digital minister, recently called for the BOJ to tighten policy to support the yen and cap inflation.
- The bank is expected to tweak its quarterly inflation projections to reflect Prime Minister Fumio Kishida’s decision to resume utility subsidies this summer. That may invite a small downward revision to this year’s forecast while possibly raising next year’s view.
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