Bank of Japan (BoJ) preview: Clues to be sought on the timing for the BoJ’s next move

What to expect at the upcoming BoJ meeting?

The Bank of Japan (BoJ) is set to hold their monetary meeting across 19 – 20 September 2024.

Having surprised markets back in July by raising its short-term policy target to 0.25% from a zero-to-0.1% range, a back-to-back hike may seem overly aggressive, especially with some fingers pointing to the hawkish BoJ for exacerbating the global market turmoil in early August. Market rate expectations have been fully priced for a wait-and-see scenario by the BoJ next week as well, therefore any inaction on interest rates may offer little surprises and trigger limited moves in the Japanese yen and the Nikkei.

Previously, the BoJ has also carved out a plan to taper its debt purchases, which helps to remove some policy uncertainty. However, comments from BoJ Governor Kazuo Ueda continue to open the door to further rate hikes, with the condition that the economy and prices perform in line with policymakers’ expectations.

Clues to be sought on when the BoJ will make its next move

Without new economic projections at the upcoming meeting, sentiments will be highly sensitive to the BoJ Governor’s comments to lead expectations on the timing of the central bank’s next move.

At the previous meeting, policymakers’ projections showed an upward revision in core inflation for FY2025 and FY2026, while real gross domestic product (GDP) growth estimates remained unchanged around 1%, which reflects some views that demand-led inflation may be more ingrained. Since then, higher-than-expected Japan's inflation and wage growth have offered the BoJ more confidence that a virtuous wage-price cycle will keep inflation above 2%, which should pave the way for further policy normalisation ahead.

That said, the central bank faces a tricky balancing act between inflation and growth, which suggests that any unwinding in its ultra-accommodative policies may remain a gradual process. Recent 2Q GDP figures were revised lower, household spending remains weak, while manufacturing Purchasing Managers' Index (PMI) remains in contraction amid weak export demand from key markets. The recent strength in the Japanese yen may also alleviate previous concerns around its weak currency, which creates less pressures for the central bank to act.

Ahead, the Governor is likely to stick to his ‘basic stance’ for further rate hikes if the country’s inflation and economic growth remain on track, and reiterate that short-term rates are still ‘very low’. However, any stronger emphasis on higher-than-expected inflation and wage growth could potentially lean hawkish, which could see rate expectations adjust for an earlier rate move. On the other hand, putting the spotlight on growth risks could reaffirm current expectations for rates to stay unchanged until December this year.

USD/JPY: US-Japan policy divergence to serve as a weighing block

The USD/JPY has recently touched its lowest level since January this year, with the push to a new lower low pointing to the broader bearish trend in place. Its daily relative strength index (RSI) has also failed to cross back above its mid-line thus far, while a bearish crossover was formed lately between its 50-day moving average (MA) and 200-day MA.

While expectations are fully priced for an inaction from the central bank this month, policy divergence between the US Federal Reserve (Fed) and the BoJ will likely remain a weighing block for the pair, with the US-Japan 10-year bond yield differentials narrowing to its lowest level since August 2022. The latest Commodity Futures Trading Commission (CFTC) data revealed non-commercial (speculative) net long positions in the yen increasing for the fourth consecutive week. Amid the seasonally weaker month of the year for risk assets, any subsequent risk-off moves may drive greater safe-haven flows for the yen as well.

Ahead, should the 140.53 level of support be broken, it may likely pave the way for the pair to head towards the 137.32 level next. On the upside, the 146.26 level may be a crucial resistance to watch.

Nikkei 225: Can the upward trendline support hold?

A close to 10% sell-off since the start of the month has dragged the Japan 225 index back to an upward trendline support around the 35,200 level (the aggressive 5 Aug dip below the trendline seems like a false breakdown). Holding above the trendline support will be crucial for buyers, with any failure to do so potentially paving the way for the index to head towards its 5 August closing low.

Any bounce in the Japan 225 index may face a test of resistance at the 37,141 level, followed by the 37,700 level where its key 200-day moving average (MA) stands. For now, we may still expect a tone of caution in the lead-up to the upcoming Federal Open Market Committee (FOMC) meeting and with weak seasonality underway.