Bank of Japan (BoJ) preview: Groundwork for a policy shift remains on watch

What to expect at the upcoming Bank of Japan (BoJ) meeting?

The BoJ remains one of the few central banks to stick to its accommodative policies, while the rest of the world is under tighter financing conditions. This includes maintaining a -0.1% target for short-term rates and a 0% cap for the 10-year bond yield under its yield curve control (YCC) policy. While the central bank’s easing stance is expected to remain unchanged at the upcoming meeting once more, any shift in tone to lay the groundwork for an eventual rise in interest rates will be heavily scrutinised. Current market expectations are not pricing for any rate changes until April 2023, although views are still very much split on whether a 0.10% hike or a larger 0.20% shift is warranted. But for now, it seems that a no-change is likely to last over the next three meetings.

In October, Japan’s inflation at 3.6% has further pulled apart from the central bank’s 2% target, but the BoJ has largely remained in the ‘transitory’ camp and is likely to point towards the 1.8% muted wage growth to justify little persistence in pricing pressures. Recent Purchasing Managers' Index (PMI) figures also revealed dampening activities in both the manufacturing and services sector, as softening global demand and still-elevated inflationary pressures kept Japan’s economic conditions in check. These may support the central bank’s ongoing priority for economic growth over upside risks inflation until we are able to see improvement on those fronts. Nevertheless, at the upcoming meeting, any discussions to adjust its yield curve control policy will be on watch as a reflection of future policy shifts, along with any signs of a step away from its usual ultra-dovish tone. Any of which could be looked upon as a hawkish surprise, which may trigger a knee-jerk jump in the Japanese yen.

USD/JPY: Declining yield differential drives some unwinding

Falling Treasury yields are driving a narrower yield differential for the USD/JPY (大口）, with the pair retracing close to 11% from its October 2022 peak. While there are some renewed strength in the US dollar after the hawkish takeaway from the recent Federal Reserve (Fed) meeting, the pair remains resisted below its 200-day moving average (MA) at the 137.30 level, which runs in coincidence with a key 38.2% Fibonacci retracement level. Any break above the 137.30 level may be warranted to suggest a shift in sentiments to the upside. Until then, the USD/JPY continues to trade with a downward bias, which could leave the 132.80 level on watch as the next level of support.

Nikkei 225: Tracking global risk-off sentiments lower

After failing to overcome its 28,400 level of resistance, the Nikkei 225 index took the cue from its US counterparts by retracing close to 5% from its November peak. The moving average convergence/divergence (MACD) has headed below the zero-line, which could reflect a reversal in momentum to the downside. Current movement is attempting a retest of its 200-day MA and failure for the MA-line to hold may trigger further downside to the 26,900 next.