PREVIEW: Bank of Japan Monetary Policy Preview, Due On Tuesday 23rd January

The Bank of Japan’s (BoJ) 2-day policy meeting will conclude on Tuesday, and the central bank is expected to continue the inaction seen throughout the entirety of 2017 by maintaining its QQE with Yield Curve Control policy, and leaving its benchmark interest rate unchanged at -0.10%. The upcoming meeting will also include the release of the latest Outlook Report, containing the board members' median forecasts for real GDP and core CPI. The current BoJ Board Members' median forecasts can be found below:

Real GDP:

- Fiscal 2017 forecast at 1.9%.

- Fiscal 2018 forecast at 1.4%.

- Fiscal 2019 forecast at 0.7%

Core CPI:

- Fiscal 2017 forecast at 0.8%.

- Fiscal 2018 forecast at 1.4%.

- Fiscal 2019 forecast at 1.8% (excluding effects of sales tax hike).

Not much has changed in terms of central bank rhetoric since the previous meeting, as Governor Kuroda has stuck with the profusely repeated statement that the BoJ will maintain its QQE with YCC for as long as is required to reach 2% inflation in a stable manner, while he also suggested that the economy is experiencing steady growth.

Furthermore, economic data releases since the previous meeting haven't been much of a game changer, despite the latest national CPI (0.6% vs. Exp. 0.5%, Prev. 0.2%) and core CPI (0.9% vs. Exp. 0.8%, Prev. 0.8%) releases beating expectations, although inflation remains well shy of the Bank’s 2.0% target.

As policy tweaks are widely seen to be off the table for quite some time, the near-term focus regarding the BoJ seems to be on whether Governor Kuroda will be reinstated for another 5-year term when his current term expires in April.

Participants will also be looking out for any commentary regarding the recent bout of JPY strength with USD/JPY sitting on the 110 handle vs. the 113 seen at the December meeting. BoJ watchers will also be on the lookout for clues surrounding the BoJ's bond buying intentions after a recent reduction of 10year - 25 year and 25 year maturities in the Bank’s Rinban operations triggered tapering fears and spooked markets earlier this month. Since then, sources close to the BoJ have stated that the market overreacted to the change, noting that the move wasn’t meant to signal a broader policy shift.

As usual, there is no scheduled time for the decision, which usually comes any time after the start of the Tokyo lunch break at 0230GMT/2030CST.

What The Bank Desks Are Saying: -

Barclays: We expect the BoJ to keep policy intact, while revising up its GDP forecasts and retaining its CPI projections.  All-industry index: We estimate that the all-industry index rose again in November, with higher readings for both the tertiary index, which accounts for over 70% of the total, and industrial production, which has a weighting of more than 20%.

BAML: After a quiet 2017, interest in the BoJ is rising once again. On 9 January, the BoJ's announcement of a ¥10bn reduction in its "rinban" purchase of JGBs in the 10-25yr and 25-40yr segment caused a strong reaction in the markets and reignited headlines of early BoJ normalization. As we noted last week, we think the markets (in particular FX) over-reacted to the announcement. Our view is that the modest trimming of purchases is not, in and of itself, a signal of a new policy bias. Questions at 23 January's post-MPM press conference will nonetheless focus on the BoJ's "stealth tapering" of JGB purchases and the recent market reaction. We expect the governor to reiterate the central banks' stance that the quantity of JGB purchases is an endogenous variable under YCC and could slow or reaccelerate depending on trends in the economy and financial markets. That said, we think the governor will strike an overall dovish tone at the conference to minimize risks that speculation over a pre-mature BoJ exit would trigger unwanted yen appreciation. The risk of rate hikes in 2018 has ranked top in our client conversations this week. We remain confident that this won't happen in spite of early change to communication. Inflation dynamics will matter for rate moves. FX enters in these considerations. Consequently, we stick to our view that the depo rate will be raised in 2Q19 and 4Q19 (20bp each). Last week's ECB speak, even among hawks, supports this view. Markets suggested we were (unusually) hawkish until recently. Pricing has now moved our way.

Daiwa: Given the upbeat econmic sentiment reflected in today’s Reuters Tankan, and what might well have been another quarter of above-trend growth at the end of 2017, Kuroda will be able to remain pretty bullish about the economic outlook. Nevertheless, with core CPI inflation still less than half the BoJ’s 2% target, we (like the consensus) expect the Bank to retain its existing main policy settings, i.e. the -0.1% interest rate on banks’ marginal excess reserves and the pledge to keep 10Y JGB yields ‘at around zero per cent’. However, in light of the slight reduction in the size of the Bank’s longer-term JGB purchases at its operations so far this month, unless we suddenly see significant upward pressure on yields (which, given the large share of the market already held by the BoJ, as well as its highly credible and rarely used unlimited fixed-rate purchase facility, might seem unlikely), we think it is clear that the BoJ has no intention to meet the ¥80trn annual rate of increase in its holdings still specified in its recent policy statements. After all, the moves this month follow a year in which actual purchases amounted to just ¥58trn. So, while the Bank will likely re-commit to maintaining purchases ‘at more or less the current pace’, this might just be the month that it explicitly acknowledges that this will result in net purchases closer to last year’s total than ¥80trn, or, better still, formally de-link achievement of the yield curve control target to a specific level of JGB purchases.  While it’s not expected, the BoJ might also finally wish to tweak its programme of ETF purchases. We continue to think that there is little sense in the Bank continuing to support an equity market that has risen to levels not seen since the early 1990s. While it seems unlikely that the Policy Board would decide to bring such purchases to an abrupt halt, a reduction in the annual pace – which was doubled to ¥6trn in mid-2016 – would be neither a large surprise nor unwelcome. That said, the BoJ may be reluctant to make too many tweaks to policy settings at a single meeting, especially in light of recent yen strengthening. However, we do expect it to extend by one year its special fund-supply facilities. More prosaically, revisions to the projections issued in the Outlook Report will likely be minor. Given stronger-than-expected GDP growth in Q3, positive signs for Q4 and benign trends abroad, it would not be surprising to see a modest upward revision to the Board’s collective sense of growth prospects in FY17 and perhaps FY18 (the median forecasts in October were 1.9%Y/Y and 1.4%Y/Y respectively). Until it has seen the outcome of the spring wage round, it seems unlikely to revise up significantly its forecasts of inflation (the median Board member forecasts of core inflation in October were 0.8%Y/Y, 1.4%Y/Y and 1.8%Y/Y for FY17, FY18 and FY19 respectively, the latter excluding the impact of the scheduled hike in consumption tax). Nevertheless, it will continue to suggest that it expects the 2% target to be met around FY19.

HSBC: Underlying inflation pressures have been absent so far, despite positive q-o-q growth for seven consecutive quarters. Strong economic activity is not translating into higher prices, with wage growth showing limited signs of acceleration due to various structural factors. Consequently, the BoJ is likely to maintain its extremely easy monetary policy in the foreseeable future, as a premature pullback will dampen medium-term inflation expectations and also result in a notable correction in financial market instruments including the value of the yen. Meanwhile, this is likely to push the Bank’s real GDP forecast for FY2018 slightly higher from the current 1.4%. Market participants will be closely watch whether the Bank keeps its optimistic core CPI forecast of 1.4% for FY2018, while we see risks that this could be marked marginally lower.

Nomura: We expect the BOJ to leave monetary policy unchanged at the meeting. The economy has been solid and, although core inflation (inflation based on all items in the CPI index less fresh food) has been rising, it is far from the 2% target, indicating there is little justification for making any changes to monetary policy. In the Outlook for the Economy and Prices (Outlook Report) that will be released at the time of the meeting, we expect GDP growth forecasts for FY17 and FY18 to be raised. Since the Outlook Report was last released in October 2017, growth in the global economy has gathered pace, and we expect this to be reflected in the upcoming release of the report. Annual revisions to GDP data might also affect FY17 forecasts. We think the forecast for core inflation will be left unchanged. Recent increases in crude oil prices are likely to boost inflation, but yen strengthening against the dollar is likely to counter this boost and we do not expect changes to the core inflation forecast resulting from changes to import prices to be carried out this time.  At the BOJ governor's press conference after the meeting, the governor might be asked about the decision to reduce the amount of longer-term bonds it purchases and his view of the market's reaction, as JPY strengthened after the purchase amount was scaled back on 9 January. We expect Governor Kuroda to reiterate the position that intentions with regard to changes to monetary policy are not reflected in daily market operations and that, regardless of the market's reaction, tenacious easing efforts will continue.

22 Jan 2018 - 15:30- Fixed IncomeData- Source: RANsquawk

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