BOJ Preview – watch for economic outlook upgrades

The Bank of Japan (BoJ) will conduct their first monetary policy meeting of the year on 30-31st January and will make known their decision after the meeting. 

Bank of Japan
Source: Bloomberg

With improving economic conditions, there would be little impetus for the central bank to amend the current set of tools. The focal point would however be on the quarterly outlook report that will be published alongside the monetary policy decision.

Consistent growth prints and accelerating inflation have been seen of late, though the latter remains a significant gap from the BoJ’s 2.0% “price stability target”. Growth wise, Q3 GDP was reported at 0.3% QoQ, sustaining in growth territory for the third consecutive quarter. Trade balance has also surged in December with exports growing at the fastest rate  in 1.5-years at 5.4% YoY.

The latest set of inflation data from Japan meanwhile reflected a 0.5% YoY price increase in November, the closest it has gotten to the price target since May 2015. December’s inflation rate has been penned in at 0.2% YoY according to Bloomberg consensus, which, if realized, would be a third consecutive month of positive price change. Moving forward, higher energy prices and the slide in the JPY bodes well for the reflation trend. This is likely to render the current monetary policy appropriate for the BoJ whose hands are tied either ways.  

Notably, after upgrading their economic assessment in the last meeting of 2016, the BoJ has been reported to be a contemplating a boost to their growth outlook in the upcoming meeting. This would be reflected in the quarterly outlook report and the more bullish outlook could present itself as a driver for the market. The current set of forecast released in November reported a 1% GDP growth forecast for 2016 while 2017 and 2018 are expected to expand at the pace of 1.3% and 0.9% respectively. Nikkei Asian Review has also reported that the upgrade could put 2017 growth expectation in the mid-1% range.

With the latest development, the next question that could dominate the market would be whether the hoard of policies from bond buying, negative interest rate policy (NIRP) to the targeting of 10-year yields may be relieved in light of improving conditions. If that is the plan moving forward, the pace of tightening could be of interest next. A significant upgrade to the economic outlook could very well be taken as a hawkish signal by the BoJ.

As things stand, the central bank is still very likely to hold the inflation outlook unchanged. Bloomberg has also reported that BoJ officials have reflected that they would rather be late than early in raising their 10-year bond yield target from zero percent, indicating that it may be long before we see any changes.

On overseas developments, the BoJ would be expected to issue their view. Due concerns on the market conditions have been warranted with top officials from Japan’s finance ministry, central bank and financial regulation, meeting ahead of the BOJ meeting to exchange views on global financial markets. Details had not been shared.

A brighter picture painted of the economy would be of no surprise to the market, though an overtly strong signal could tip USD/JPY in the favor of the former. USD/JPY has been on a downtrend since the start of the year and found support at $112.50. Upside could nevertheless be limited. 

Meanwhile the Nikkei 225 has been seeing range bound trade with 19,000 level serving as a pivotal point. Dips to support ahead of 18,500 makes good entry and a break above 19,200 will expose the upside towards recent highs. 

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