Bank of Japan June Policy Meeting Preview

WHEN

11 June 2013, usually released between 04:00 BST and 05:00 BST: Bank of Japan release results from its latest policy meeting

11 June 2013, 07:30 BST: BoJ governor Kuroda gives a press conference following the BoJ’s monetary policy announcement

FINE TUNING JAPANESE MONETARY POLICY

There have been doubts over the efficacy of Abenomics in recent weeks, as “a few” of the BoJ’s own policymakers expressed in its May policy meeting, and prime minister Shinzo Abe’s partial unveiling of his “third arrow” (structural reforms) underwhelmed traders last week, Abe is expected to expand on his brief outline on Friday.

Additionally, on-going questions over the Fed tapering its QE3 programme, and a potential economic slowdown in China, have also contributed to volatile trading conditions in Japan.

The yen has subsequently strengthened against the US dollar, trading below the psychology important Y100 level at pixel time; the Nikkei index has plunged by over 15% from its highs in May; and 10-year Japanese government bond (JGB) yields have more than doubled since April, currently trading around 0.85%.

However, there are tentative signs that Abenomics is starting to bear fruits. This week, Japanese economic growth for the first-quarter of 2013 was revised upwards from 3.5% year-on-year, to 4.1% year-on-year. Further, CPI inflation in Tokyo, a leading indicator of Japanese inflation, turned positive in May for the first time since 2009, suggesting that Abenomics may be on course to deliver 2% inflation in 2 years’ time.

But the volatility in the JGB market, as well as the strengthening of the yen over the last few days seems to be at odds with Abenomics. For Abenomics to work, JGB yields need to stay low on a nominal basis, and the yen needs be weak against the US dollar.

The move higher in JGB yields is “starting to obstruct portfolio allocation abroad,” according to Geoff Yu, an analyst at UBS. “Even lifers are joined the list of net sellers in May.” Consequently, the BoJ may take action to stem the volatility in JGBs and the yen.

Although the BoJ is likely to keep its rate on hold at 0.1% on Tuesday, there could be tweaks to its bond buying programme. Currently, it is committed to buying 70% of the gross issuance (and more than 100% of the net issuance), and this plan is likely to be maintained at Y60trn to Y70trn annually.

“We believe the BoJ is likely to extend the loan period for its fixed-rate fund-supplying operations against pooled collateral (Japanese-style LTRO),” say analysts at Nomura. The BoJ is likely to do this by extending the loan period in these operations from one year to (potentially) up to three years.

Some have also suggested that the BoJ may hike its self-imposed cap on REIT (real estate investment trusts) purchases. And some are speculating that the BoJ may begin buying equities as part of its easing efforts, which is likely to support Japanese equities.

“These measures would have a greater impact on market sentiment. But it remains unclear whether officials will choose to make such policy announcements in the week ahead,” says Mansoor Mohi-uddin of UBS. One thing is clear: the BoJ does not appear to be shy of taking further bold action to achieve its aims.

But there is a lot of uncertainty surrounding this meeting, and analysts at Barclays remind us that there is an outside chance that the BoJ will stay on hold until July, after it has conducted its interim assessment of its semi-annual report.

Going forward, however, it is likely that the yen will resume its slide against the dollar, according to UBS, which forecasts dollar-yen at Y110 by the end of 2013. “Last week’s massive position clear-out in yen shorts and Nikkei longs should allow dollar-yen to base now in a Y95-Y100 range, before climbing back into its earlier 100-105 range,” says Mohi-uddin, “but Japanese policymakers will need to take more actions in the week ahead to calm volatile market sentiment.”

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