Decision-Day Guide: Kuroda View on Yields in Focus as BOJ Meets

  • All analysts surveyed by Bloomberg expect no major change
  • Key will be guidance for operations to control bond yields

Decision Day: What to Expect From the Bank of Japan

The Bank of Japan on Tuesday will conclude its first policy meeting since Donald Trump’s election victory last month reset the global market landscape, triggering a surge in bond yields and a slide in the yen.

All 39 economists surveyed by Bloomberg forecast no action from the BOJ this week. Many cited a brighter outlook for inflation because of the yen, which is trading around the weakest level since February after the Federal Reserve raised its policy rate.

Investors will be eager to gauge Governor Haruhiko Kuroda’s views on bond yields and the economy. Japan’s benchmark 10-year yield last week rose to the highest level since January, part of a surge in global yields that could pose a challenge for the BOJ, which has pledged to keep the 10-year yield at around zero to stimulate the economy.

“Markets are keen to know the BOJ’s view on the recent surge in bond yields and how they are planning to control the curve after unexpected moves in the bond market,” said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co.

The board meeting typically ends between noon and 1 p.m., followed by Kuroda’s press briefing at 3:30 p.m.

Here are things to watch:

View on Yields 

Bond traders are looking for any guidance from the BOJ on how it plans to manage the yield curve, including tolerance for deviation from the 0 percent target for 10-year debt, a key element of its policy regime. Seeking to contain rising yields, the BOJ conducted its first fixed-rate operation in November and last week increased the amount of bond purchases at an operation.

If the BOJ commits to keeping the yield at around 0 percent, and U.S. yields continue rising, it would risk a further decline in the yen, perhaps to unwanted levels.

Many market participants see a range of -0.1 percent to 0.1 percent as tolerable for the BOJ.

Clues on Tapering

BOJ watchers had already begun to speculate about the beginning of tapering in the central bank’s bond purchases. Deutsche Bank economist Kentaro Koyama sees 2017 as the “year of the taper.” April is the most popular pick among economists surveyed for the central bank to begin reducing its purchases, according to a Bloomberg poll.

Buying fewer bonds would make the policy regime more sustainable. A Bloomberg analysis indicates the pace of buying has already slowed toward 70 trillion yen ($597 billion) annually, from its stated target of 80 trillion.

Economic Assessment

Recent economic data have suggested Japan’s economy is on stronger footing, and investors will be looking for the BOJ’s views. Improvements in consumer spending and corporate sentiment, as well as signs of a bottom in headline inflation, would give the BOJ room to upgrade its assessment of the economy and forego any additional stimulus in the near term.

Japan’s economy expanded for a third quarter during the July-September period, while sentiment among large manufacturers improved for the first time since June last year.

Still, any upbeat language should be taken with caution. While conditions appear to be approving, few economists see strong growth ahead.

Currency Tailwind

The yen’s dramatic slump, which in November saw its biggest drop since 1995, is among the key changes facing the BOJ since its last policy meeting on Nov. 1. The currency weakened 11 percent against the dollar since that meeting, reaching the lowest level in 10 months last week as the difference between U.S. and Japanese interest rates widened.

A weak yen creates inflationary pressures through higher import costs and boosts corporate profits. It could also begin feeding into wage growth and consumer spending. If Kuroda expresses a sense of relief about the yen, it could reinforce the view that the BOJ is far from considering additional stimulus.

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