BOJ unlikely to surprise

The Bank of Japan (BOJ) is expected to maintain its policy stance when it announces its monetary policy after a two-day meeting.

Source: Bloomberg

There was less pressure on the central bank to expand its massive programme to increase monetary base by ¥80 trillion annually after it pushed back its target date for reaching the 2% inflation to the first half of fiscal 2016 (April – September 2016). Moreover, Governor Haruhiko Kuroda said last Friday that there was no need for further easing for now with Deputy Governor Kikuo Iwata echoing his boss’ remarks this week. He said that Japan’s economy is sustaining its moderate recovery trend and inflation expectations are rising. Taken together, their comments point towards an unchanged policy stance. Additionally, positive economic data released this week supported the argument to conserve monetary ammunition. Annualised Q1 GDP beat estimates at 2.4% alongside better-than-expected PMI reading and machine orders

Consumer spending is key for BOJ to meet their inflation target. Rising private consumption for the third straight quarter should see BOJ offering a brighter assessment of household spending in today’s statement. Iwata-san expected inflation to accelerate later this year as the effect of last year’s sales tax hike wanes and lower energy costs spur consumption. Meanwhile, Japan’s monetary authorities may consider upgrading its economic outlook for the first time since July 2013, according to Nikkei newspaper.

Almost 60% of 36 economists polled by Bloomberg see the Japanese central bank increasing its stimulus by the end of October. However, the BOJ may face a significant roadblock. They may not find enough bonds to buy as Japan Post may slow debt sales. As at December 2014, the central bank held ¥207 trillion of JGBs, accounting for over 20% of the market, data from the Finance Ministry showed. Estimates by Mizuho Research Institute suggested that the BOJ will have bought up more than 80% of all outstanding JGBs in five years.

Ahead of the Asia Open

We’ve seen generally positive leads from overnight markets but traders will be eyeing Fed Chair Yellen’s speech later tonight for more clues on the next Fed move. The BOJ policy decision will be the main course today with little other data of note. A raft of speeches from major central bankers, including ECB Draghi, Fed Yellen and Fischer, as well as BOE Carney may pose headline risks. As such, cautious undertone should persist in the Asian markets ahead of the weekend.

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