Decision-Day Guide: Eyes on BOJ Outlook for Economy, Inflation

  • Bank of Japan to release first inflation forecast for FY2019
  • Some 38 of 39 economists surveyed forecast no policy change

Kuroda Says BOJ Will Maintain Rates Depending on Economy

While the Bank of Japan is widely expected to keep its monetary program unchanged on Thursday, investors will scrutinize its guidance on the economy, inflation and bond purchases for clues to any future changes in policy.

All but one of 39 economists in a Bloomberg survey predicted the BOJ will leave its stimulus measures unchanged at the two-day gathering. That leaves investors to focus on the quarterly economic outlook, at a time of mixed economic data and elevated tensions between North Korea and the U.S.

The BOJ may lower its inflation forecast for the fiscal year that started this month, people familiar with discussions at the central bank told Bloomberg. JPMorgan Chase & Co. and SMBC Nikko Securities Inc. said the central bank will probably upgrade its growth outlook and downgrade its price forecasts.

The European Central Bank will conclude its policy meeting hours after the BOJ’s. Any clearer sign of tightening from ECB President Mario Draghi following the first round of voting in the French election could weaken the yen after BOJ Governor Haruhiko Kuroda said he expects the BOJ to keep policy very accommodative for some time.

The BOJ will release its policy statement and outlook report at the end of the meeting, typically between noon and 1 p.m. in Tokyo. Kuroda will hold a press briefing at 3:30 p.m.

Outlook Report

Kuroda told Bloomberg in an interview last week that the Japanese economy is stronger than expected just a few months ago, increasing the speculation that the BOJ will upgrade its growth projections. Yet inflation hasn’t improved much, he acknowledged.

Exports and production have strengthened recently. The central bank currently sees Japan’s economy as continuing a moderate recovery trend, predicting growth of 1.5 percent for this fiscal year.

The current BOJ inflation forecast calls for the 2 percent target to be reached somewhere around the fiscal year starting in April 2018, a projection almost all economists see as too optimistic.

Nobuyasu Atago, a former BOJ director in the price statistics division, said the central bank could remove the time frame for achieving its price goal at the current meeting to send a signal that they have become more realistic.

Kazuo Momma, a former BOJ chief economist, said the price outlook is a very important and the BOJ’s overly ambitious inflation forecast makes it difficult to know what policy makers are really thinking. "Fixing it sooner is better," he said.

Bond Purchases

Bond traders are tracking a growing divergence between the central bank’s stated target for annual bond holdings and the amount it actually buys, which has been falling.

Naomi Muguruma of Mitsubishi UFJ Morgan Securities, the one economist to forecast a policy change at this meeting, in the form of a tightening, predicted the BOJ will remove the language on increasing bond holdings at annual pace of about 80 trillion yen ($718 billion) from its policy statement.

BNP Paribas SA sees a 50 percent chance the reference to the target will be removed, with buying to slow to 70 trillion yen annually toward the middle of the year.

If the target is removed or lowered, investors would likely take it as policy tightening, which would strengthen the yen against the dollar.

Kuroda’s Briefing

Kuroda is likely to be asked why Japan’s inflation isn’t stronger given the economic recovery is the most stable years. That divergence could make it harder for him to defend his views on the price target.

After four years of unprecedented monetary stimulus, inflation has only recently moved out of negative territory and now sits around 0 percent. With the prospect of continued stimulus, some lawmakers are calling the BOJ to explain how it might exit its current policy framework. Kuroda may be pressed to address this question at the media briefing.

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