Bank of Japan Preview: Forecast from 12 major banks

The Bank of Japan is scheduled to announce its decision on Friday at 03:00 GMT and as we get closer to the release time, here are the expectations forecast by the economists and researchers of 12 major banks.

The BoJ is widely expected to keep its policy rate steady at -0.1%. What’s more, the yen has strengthened after Nikkei reported that the cetran bank may expand the yield band, allowing returns on ten-year bonds to rise.
Citibank
“We expect any changes resulting from the review to be no more than fine-tuning. BoJ will likely stay with its current band for fluctuation in long-term rates (+ or – 20bp from a 0% target on 10Yr JGB yield) and look to operational modifications for greater flexibility in JGB purchases. Citi analysts also think markets have largely factored in more flexible ETF purchasing. BoJ could produce some kind of arrangements to lend credibility to a deeper negative interest rate (NIR) scenario so BoJ can cushion vs future shocks.”

Capital Economics
“The pendulum seems to have swung back against the Bank of Japan making any changes to its yield target next week or indeed any major changes at all. That is most likely because the Bank doesn’t want to risk triggering an adverse market reaction when the economic recovery from the pandemic is still ongoing. The idea is likely to return when the economy looks more secure.”

Deutsche Bank
“We believe it will adjust its present policy framework after the release of the results of its ongoing policy assessment. We also see the meeting as more unpredictable following Governor Kuroda’s comments on 5 March, but they believe the bank will consider more effective equity ETF purchasing along with measures to alleviate the adverse side effects of its negative interest rate policy.”

TDS
“BoJ is expected to announce the results of its review of its policy tools and in particular clarification on the tolerated trading range for 10-year JGBs. Additionally, there is speculation that BoJ may remove its annual ETF target of JPY 6tn, while keeping its ceiling of JPY 12tn, allowing more flexibility for the Bank. Recent JPY weakness could also be a focus.”

BBH
“While no change is expected in its main policy settings for rates and YCC, the bank will also release the results of its policy review and there are some possible tweaks to its ETF purchases and other minor changes. It will likely pay some lip service to a possible rate cut but one is highly unlikely. We do not think the BoJ will allow greater fluctuations in its YCC policy, not in the current rising rate environment. When all is said and done, the BoJ should just sit back and let the market take USD/JPY higher rather than rock the boat with some sort of cosmetic change in policy.”

DBS Bank
“The BoJ has been conducting a review on its monetary policy framework and will announce the results at Friday’s meeting. Policymakers may want to tweak the pledge of buying JPY6tn ETFs per annum (upper limit: JPY12tn), and provide clearer guidance on the range of 10-year JGB yield. The aim is to obtain more flexibility in equity and bond purchases and make the current policy framework more sustainable. Policy overhaul remains unlikely, given the recent volatility in the stock market, rise in global yields, challenging economic growth outlook, and risk of deflation.”

BMO
“Normally, there’s not too much interest as the Bank seems to be on hold for eternity. However, given the recent behaviour of the bond market, there is some speculation that Governor Kuroda and the rest of the Policy Board may have some new ideas to discuss. Reuters’ sources mentioned the possibility of changing its tiering system, or greater flexibility around its ~0.10% target for 10-year JGBs (from a 40 bp range to 60 bps, perhaps), which isn’t a bad idea. If there are any changes forthcoming, the March meeting would be an appropriate time to bring them up as the Bank will also release the results of its policy review (is QQE with YCC working, along with the purchases of ETFs and J-REITs and corporate bonds?). The option on changing target band would likely be the first one off the shelf to use.”

HSBC
“The BoJ is currently doing a review of its monetary policy easing. The aim is to make monetary policy easing more sustainable for the long haul, as the 2% inflation goal still looks rather elusive, with progress being derailed by the pandemic. We believe the review may cause some temporary volatility in USD/JPY. We can envision USD-JPY falling in a knee-jerk reaction if the BoJ is interpreted as not being sufficiently dovish (by widening the YCC range, tapering exchange-traded fund (ETF) purchases, and making only minor tweaks to the Negative Interest Rate Policy (NIRP)). Conversely, USD/JPY may rise further over the near term, if the BoJ is seen as trying to be even more accommodative on its monetary policy easing (by leaving the YCC range unchanged and making a deeper NIRP a credible threat). However, unless the BoJ takes radical action, (i.e., some kind of acceptance of Modern Monetary Theory (MMT), for example, direct financing of the government’s fiscal deficit) we doubt there will be lasting implications for the exchange rate.”

SEB Bank
“We expect BoJ to maintain its 10y yield target range, despite some appetite for more flexible policy implementation. The meeting is unlikely to affect JPY outlook. USD/JPY continues to shrug off strong dividend income, focusing instead on the widening yield differentials. Data in Japan continue to struggle, requiring BoJ to remain dovish.”

Credit Suisse
“The BoJ seems to believe that the YCC has worked well, and it is unlikely for the Bank to amend the current setting of YCC (yield curve control), where it targets the Tier 3 deposit rate and the 10-year JGB yield. Meanwhile, the Bank may tweak the 10-year JGB yield target. In other words, we do not rule out the possibility that the Bank would rewrite the 10- year JGB target from ‘around 0%’ to ‘0-0.25%’. The Bank appears to have two options for the ETF purchase operation, namely, revising the target to a range-based one, such as ‘2-4 trillion yen’ or scrapping the target. Given that the BoJ’s ETF holding already amounted to 36 trillion yen or around 4.8% of the total market cap of Tokyo Stock Exchange, it may opt for the latter, which will give the Bank more discretion for the buying amount. The BoJ would simultaneously demonstrate its intention to support the equity market proactively in critical times. Finally, we do not foresee the BoJ altering its commitment on monetary base expansion. The Bank is expected to reconfirm that it will continue to make monetary base expand until after the CPI inflation rate rises above +2%.”

UOB
“We still expect the BoJ to do more and enhance its monetary policy easing further, most likely through increasing its JGB purchases and expanding its lending facilities to Japanese corporates and SMEs. The March 2021 MPM will take on added significance as the BoJ is due to announce the review of its QQE framework and that could portend material monetary policy changes in this meeting.”

Danske Bank
“Neither negative rates nor yield curve control is up for review and thus we expect no revolutions, only adjustments. A possible widening of the tolerance band on the 0% 10yr rate target has been discussed, which would be negative for USD/JPY. We do not think the Bank of Japan will run the risk of a stronger yen hampering the economic recovery and thus we expect no such changes for now.”