- The Bank of Japan could deliver the first rate hike since 2007.
- Japanese Unions clocked the largest wage increase in over three decades.
- BoJ’s Governor Kazuo Ueda linked monetary tightening with higher wages.
- USD/JPY could collapse towards 146.48 on a hawkish decision.
The Bank of Japan (BoJ) will announce its monetary policy decision on Tuesday, pretty much at the same time that the Reserve Bank of Australia (RBA) will do the same. Central banks stand out this week, which will also include the decisions of the United States (US) Federal Reserve (Fed) and the Bank of England (BoE).
The BoJ is a particular case, as it is the only central bank maintaining an ultra-loose monetary policy. Interest rates in Japan have been steady at -0.1% since 2016, with policymakers claiming lagging wage increases and doubts about sustainable healthy inflation require continued caution. To keep rates depressed, the BoJ also introduced the Yield Curve Control (YCC) in September 2016, as inflation remained stubbornly below target.
Bank of Japan Interest Rate Decision: Why this time could be different
Most major central banks embarked on reversing their monetary policy in mid-2022 when inflation soared to multi-decade highs in the coronavirus pandemic aftermath. Interest rates were pushed to record levels, and price pressures receded, although they are still above target. And yet again, central banks are changing course. Market participants expect central banks to start trimming interest rates in the upcoming months, although at a more cautious pace than previously anticipated.
The BoJ’s decision to keep rates on hold was largely linked to depressed wages. However, news over the weekend showed that Japan’s largest group for unions, the Japanese Trade Union Confederation, or Rengo, announced an annual wage increase of 5.28%, the largest raise in over thirty years. BoJ Governor Kazuo Ueda said in the last few weeks that the end of negative rates would depend on such negotiations, and the latest announcement is fueling bets the BoJ will finally leave negative rates.
Meanwhile, core inflation in Japan fell for a third consecutive month in January to its lowest level in almost two years. The core Consumer Price Index (CPI), which excludes fresh food, rose at a slower pace of 2%, matching the central bank’s target. At the same time, the Tokyo CPI rose 2.6% YoY from 1.8% in January, while the core CPI climbed 2.5%, in line with expectations. Such figures could spur concerns about another hold from BoJ, although inflation in Japan is expected to have accelerated in February as the effects of government fuel subsidies faded. The country will report February CPI next Friday, March 22, and the core annual CPI is foreseen at 2.8%.
When will the BoJ announce its interest rate decision, and how could it affect USD/JPY?
The Bank of Japan will announce its decision on Tuesday at around 3:00 GMT. However, it is worth reminding that Japanese policymakers do not have a set time like their counterparts, and the announcement could come earlier or later than that.
The Nikkei newspaper reported on Saturday that “The BoJ began coordinating both within and outside the bank Friday on ending its negative interest rate policy, which was adopted in February 2016. The leading plan is to raise the policy rate, currently at negative 0.1%, by more than 0.1 point to guide short-term interest to the 0%-0.1% range.”
Based on this news, the most optimistic bets aim for a rate hike in the upcoming meeting, up to 0.00%—0.10%, the first rate hike in seventeen years. Policymakers are also expected to end the YCC, although the central bank will need to continue buying bonds.
However, the BoJ is not notorious for its boldness. A more conservative outlook suggests the BoJ will pave the way for a rate hike in April while deciding on a gradual ending to the YCC.
One more factor is whether the central bank anticipates additional rate hikes in the months to come. Policymakers may well abandon the ultra-loose policy next Tuesday but cool down hopes for the beginning of a tightening cycle at the same time.
Generally speaking, a hawkish announcement tends to boost the local currency. That said, the market will need to assess the level of hawkishness, if any, of Japanese policymakers to translate it into Japanese Yen (JPY) strength. The USD/JPY pair heads into the announcement trading at around the 149.00 figure, not far from the multi-year high posted in October 2022 at 151.94.
From a technical perspective, Valeria Bednarik, Chief Analyst at FXStreet, notes: “Market participants seem unconvinced the BoJ will pull the trigger this time. The JPY was unable to gather momentum against the US Dollar, and in fact, the pair advanced for a fifth consecutive day. Sellers are aligned around the daily 20 Simple Moving Average (SMA), currently at 149.35, the immediate resistance level. A dovish announcement could push the pair towards the 150.00 mark en route to the 150.60-150.80 price zone.”
Bednarik adds: “Financial markets will be caught off guard if the BoJ actually pulls the trigger. That could result in a massive decline in USD/JPY, initially targeting 148.35, the 100 SMA in the aforementioned daily chart. Once below the latter, the pair can reach the March low at 146.48.”
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Economic Indicator
Japan BoJ Monetary Policy Statement
At the end of each of its eight policy meetings, the Policy Board of the Bank of Japan (BoJ) releases an official monetary policy statement explaining its policy decision. By communicating the committee’s decision as well as its view on the economic outlook and the fall of the committee’s votes regarding whether interest rates or other policy tools should be adjusted, the statement gives clues as to future changes in monetary policy. The statement may influence the volatility of the Japanese Yen (JPY) and determine a short-term positive or negative trend. A hawkish view is considered bullish for JPY, whereas a dovish view is considered bearish.
Read more.
