Photographer: Tomohiro Ohsumi/Bloomberg

Decision-Day Guide: BOJ to Hold, Assess Policy, Set Forecasts

  • New inflation, growth projections due with 2% target far off
  • Calls for easing wane after review, new policy framework

Instead of bracing for drama, most investors will be seeking the finer points of the Bank of Japan’s new policy framework as a two-day meeting comes to an end on Tuesday.

One focus is exactly how the BOJ will meet its new target for 10-year bond yields, and the implications for its asset purchases. The BOJ is also due to update its inflation and growth forecasts. It is widely expected to lower its inflation outlook, and extend the target date for reaching its 2 percent price goal beyond the end of Governor Haruhiko Kuroda’s term in April 2018.

All but two of the 43 economists surveyed by Bloomberg expect no additional easing this month. The two who said they expected easing both forecast a cut to the negative interest rate. HSBC Holdings Plc later dropped its call for the negative rate cut. Some 35 percent of respondents said they thought Kuroda’s BOJ is done with expanding stimulus.

Mari Iwashita, chief market economist at SMBC Friend Securities Co. in Tokyo, is among those who think the central bank is unlikely to ease again under Kuroda. “There’s a good chance that the BOJ will do nothing until Kuroda’s term is over unless inflation expectations plunge or a global economic shock occurs,” Iwashita said.

The board meeting typically ends between noon and 1 p.m. in Tokyo, with Kuroda to brief the press at 3:30 p.m.

New Focus

Kuroda, known for shocking market participants early in his tenure, in September shifted to a strategy focused on sustainability. The BOJ said it would seek to pin the 10-year government bond yield near zero, while keeping a rate on some commercial bank reserves at minus 0.1 percent.

Investors are still paying close attention to the BOJ’s asset purchases, particularly of Japanese government bonds. The policy shift came as many concluded that the BOJ had neared the limits of its asset purchases.

Kuroda has said he sees no immediate need to back away from the current JGB buying pace of 80 trillion yen ($763 billion) a year to meet the 10-year yield target, while acknowledging the BOJ may not need to buy that much to do so. He has said purchases were likely to fluctuate.

The BOJ may drop a reference to its target for bond purchases from policy statements in coming months, according to people familiar with discussions inside the central bank.

Distant Target

The fading expectations for action come despite inflation readings that earlier this year had economists predicting more stimulus. Prices as measured by the BOJ’s primary inflation gauge have fallen for seven consecutive months, underscoring the elusiveness of 2 percent inflation more than three years after Kuroda took the helm.

The measure fell 0.5 percent in September, compared with a 0.4 percent drop when Kuroda started his stimulus program in April 2013, with a pledge to hit 2 percent in about two years.

The central bank’s current projection is for reaching 2 percent in the fiscal year ending in March 2018, which only one analyst in a Bloomberg survey thought was realistic.

In a comprehensive policy review in September, the BOJ said inflation expectations in Japan were largely backward looking and would take longer to change.

More Flexibility

Kuroda said the new policy framework boosts policy flexibility and sustainability. The targets for short- and long-term rates likely won’t change in the near future as conditions haven’t changed much, he said.

He and his board members face little pressure to act from markets. Volatility in JGB trading has declined as investors seek clues to how much fluctuation in the long-term yield the BOJ will tolerate. Some BOJ officials are likely to tolerate larger deviations in times of volatility than they would when markets are more orderly, according to people familiar with discussions inside the central bank.

The yen has declined about 4.4 percent against dollar and the Topix index has risen about 3 percent since the last BOJ meeting on Sept. 21.

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