BOJ to push back against premature tightening expectations - BBH

Global Currency Strategy Team at Brown Brothers Harriman & Co. (BBH) offers a preview of the upcoming BOJ monetary policy decision, due to be announced during the Asian session on Tuesday.

Key quotes:

“The monetary convergence hypothesis will be tested further in the week ahead.  The Bank of Japan and the European Central Bank hold policy meetings.  The Bank of Japan recently reduced the amount of long-term bonds purchased, and the fact that its holdings of JGBs actually declined last month has spurred speculation that the BOJ is moving toward normalization.”

“Given the stretched nature of the dollar's technical condition, we suspect the push back against market speculation can be gentle and simply a reiteration of the current policy.  The BOJ can point to its adoption of the Yield Curve Control (YCC) in late-2016.  This policy evolution leads to fewer purchases of JGBs.  It does not mean that monetary policy is normalizing.  It is still very aggressively aimed at achieving the 2% core rate target.  Outside of JGBs, the BOJ's other purchases, including ETFs, JREITS and commercial paper, continues.  It continues to charge 10 bp for some deposits.”

“The next change in BOJ policy may come from an increase in the target for the 10-year JGB from a tight band around zero to a tight band around 10 bp.  Such a move is seen more likely in the second half.  Provided it is orderly and part of a broader move against the US dollar, Japanese officials may accept yen appreciation.  Previously, it seems that officials begin getting concerned about JPY110, but last week, Finance Minister Aso did not object to the sub-JPY111 market level at the time.”