BoJ Preview: Forecasts from eight major banks, no change to policy, but tone may turn hawkish

We don’t expect the BoJ to change policy at its upcoming meeting, but there is a good chance it drops its guidance that it won’t hesitate to take additional easing measures. Our inflation outlook suggests that the BoJ won’t be dropping its negative rate policy for the foreseeable future despite Ueda’s claim there is a non-zero chance of it happening by year’s end.

We expect the BoJ to keep its policy balance rate unchanged at - 0.1% and the 10Y yield target at 0.0%. We think stickier-than-expected inflation may make the central bank hawkish. BoJ Governor Kazuo Ueda has discussed the possibility of lifting negative interest rates as part of the central bank’s strategy to address ongoing inflation and wage increases. However, he clarified that this decision is not imminent but could be considered in the future.

We expect the BoJ to stick to its current policy stance but revise the MPM statement to point to policy normalisation. Further out, we see the YCC and negative interest rate policy ending at the October and January meetings, respectively.

We expect no changes in monetary policy by the BoJ. We do however expect another tweak to YCC later this year.

The BoJ is likely to stay pat. The central bank could however probably send a subtle hawkish message to the market after higher-than-expected inflation and a weak JPY, combined with rising global oil prices, pushed inflation up further.

We expect BoJ to leave all policy levers unchanged and doubt the BoJ is eager to spring another curveball at markets after July's surprise YCC tweak. Instead, a lot of focus will be on Ueda's comments on the Yen as he may be under pressure to lean against JPY weakness in his remarks after USD/JPY continues to drift towards 150 despite verbal interventions from MoF officials.

We expect the BoJ to pursue its main monetary policy, i.e. YCC and ETF purchases,  but it may reiterate the somewhat hawkish message from Governor Ueda, which, in our view, was aimed mostly at containing the mounting depreciation pressure on the Yen.

We believe the BoJ will ultimately choose to keep the current policy rate of -0.10% in place, and we also believe the BoJ will opt to not make any further adjustments to its YCC policy. Our rationale stems from a seemingly unsustainable source of Japan's inflation as well as recent comments that suggest policymakers still prefer to keep monetary policy accommodative. Global bond yields are close to topping out and should eventually move lower next year as central banks flip to easing. As the Fed approaches rate cuts and US yields fall, bond yield differentials between JGBs and Treasuries should narrow, ultimately supporting the Yen over the course of 2024. JPY is very sensitive to yield differentials, and as yields narrow, the Yen can be the key outperformer in the G10.