There is quite a bit of apprehension ahead of the BOJ rate meeting on Friday. Considering how the market practically crashed in the aftermath of the last one, that’s understandable. To make predictions a little more difficult, a key data point for determining monetary policy will come out just hours before the end of the meeting. It could end up being volatile even if nothing happens.
Of course markets don’t like uncertainty, and there seems to be a lot of that in Japanese markets right now. We’re counting down the days until the LDP leadership vote next week as well, which effectively means a change of Prime Minister. Monetary policy has been a matter of discussion in the political campaign, as there is growing popular unease about high inflation and policymakers worry about the effects of the large swings in the value of the yen.
Keeping Arms Length
Generally, central banks like to keep policy steady around elections. A recent example was the BOE waiting until after the election to start its rate cut cycle. On the other hand, the BOJ has a tradition of trying to maximize the impact of its policy by surprising the market. When the current BOJ Governor, Kazuo Ueda, took over, he promised to provide more warning for the markets. After the last meeting, it seems long standing habits are hard to break.
For now, the consensus among economists is that there won’t be any change in BOJ policy following the upcoming meeting. But, that was also the consensus before the last meeting. Markets are a little less sure, and are pricing in the chance of increased volatility after the meeting.
What Comes Next
Even if rates stay the same, there is disagreement about what happens after that, which could engender market volatility depending on the kind of rhetoric from Ueda in the post-rate decision press conference. Ueda seems to have adopted his predecessor’s proclivity for extensive press conferences after the meeting, giving the market a longer window to react and generate volatility.
Since the last rate meeting, BOJ officials that have spoken have sounded largely hawkish, explaining the need for more rates as inflation remains above target. Though this has to be understood in the context of defending their actions from the last meeting. The collapse (and quick recovery) of the markets in the wake of the surprise rate hike might leave the BOJ Rate more cautious this time around.
What to Look Out For
While BOJ officials are sitting down to debate what to do with interest rates, the statistics office is expected to report that headline inflation in Japan for August increased to an annual rate of 3.0% from 2.8% prior. The so-called “core-core rate” (which is roughly equivalent to the core rate of other countries) is seen remaining steady at 1.9%, however. But, with the strengthening of the yen over the last couple of months, the excuse of the exchange rate driving inflation is starting to wear thin.
What markets are likely looking for are clues for when to price in the next hike. The BOJ is expected to move in smaller increments, of just 10bps, priced in for the next move. Markets are unsure whether it will be October or December, and that could determine whether the yen gets another boost or not following the meeting.
