Bank of Japan (BOJ) preview: No change to monetary policy following Suga win

The Bank of Japan’s September monetary policy meeting cuts across September 16-17 expecting the central bank to remain well on hand following the more important succession of Prime Minister Shinzo Abe.

Yoshihide Suga to takeover PM Abe

Perhaps discussed with greater importance this week had been the Japanese ruling Liberal Democratic Party (LDP) election on Monday. The voting saw the continuity choice, Chief Cabinet Secretary Yoshihide Suga, having emerged victor in becoming the next leader to take over Prime Minister Shinzo Abe. A key figure behind the Abenomics push, Suga had the majority support from the LDP factions and thus having seen his victory largely priced in ahead of the meeting.

That said, some profit taking had nevertheless been noted following the confirmation with USD/JPY edging lower and the Japanese equity market correspondingly clocking declines. This reaction is however expected to remain temporary with coining of Suga’s reign as Abenomics 2.0 signalling a continuation of the relationship with the BoJ as well to maintain the ultra-supportive policies. With the LDP majority in parliament, Suga’s succession of Prime Minister Shinzo Abe in the leadership post is expected to replace Abe on Wednesday, September 16.

Bank of Japan to continue current path through 2020 with continuity choice

Tuning to the Bank of Japan, the wait-and-see stance may well be maintained by the central bank as the economy makes the slow climb in the recovery phase from the Covid-19 pandemic. Policy rate will continue to hold at -0.10% amid the negative interest rate policy regime alongside yield curve control whereby JGBs yield will target at around 0.00%.

Event Survey Prior
BOJ Policy Balance Rate -0.10% -0.10%
BOJ 10-yr Yield Target 0.00% 0.00%

Source: Bloomberg

The Japanese economy had recorded its third consecutive quarter of decline most recently with the Q2 2020 reading but had been showing signs of recovery. This could see to the BoJ lifting their outlook assessment as with the Fed. That said, there remains expectations for deep contraction this year that had seen the BoJ introduce a series of measures so far to alleviate the effects. Limited room to further lower interest rates remains the situation though the BoJ had continued with open market operations that had seen to its balance sheet continuing the climb.

USD/JPY trading lower in consolidation range

Profit taking following the Suga win on Monday coupled with the waning of greenback strength ahead of the Fed FOMC meeting had seen USD/JPY trading to the lower end of the 105-107 consolidation range that it had been contained within since early August. Lack of meaningful updates across both the Fed and the BoJ meetings could see prices sustaining in the sideway trade.

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