BoJ interest rate decision preview

October review

The Bank of Japan (BoJ) meets this week over October 30-31 and will announce their monetary policy decision at the end of their meeting. After the European Central Bank headed deeper into negative territory, and the Federal Reserve looking set to deliver their third rate cut for the year this week, a good portion of the market can be seen holding hopes for the Bank of Japan to follow suit. Calls for easing according to Reuters poll had increased to a two-third majority from approximately a quarter ahead of the previous September meeting.

Indeed, the BoJ had highlighted that they will review the economy and inflation in September after emphasising that they could ease pre-emptively in July. This is as economic data out of Japan reflected little signs of improvement going into Q3 while the geopolitical situation had earlier shown few signs of letting up as well. Tokyo CPI released for the month of October had unexpectedly disappointed against Reuters consensus despite the introduction of the sales tax hike in October.

Fast forward to the upcoming meeting, however, a better geopolitical backdrop looks to be the case particularly with US-China ‘Phase One’ deal likely to be signed in the horizon. This had also helped to ease pressure of a strong Japanese yen that would have otherwise provided impetus for the BoJ to act. While the BoJ had not explicitly spelled out that they will be reviewing policy as compared to economic conditions, reports from the likes of Bloomberg had also suggested that the BoJ may be holding fire this meeting, cumulating in the mixed views within the market.

Trading the BoJ release

A move to lower short-term rates in line with some of the calls would be one to lift the USD/JPY (大口） pair amid the current uncertainty over the meeting conclusion. This would likewise help with equities, watching the financial sector as the BoJ is not expected to turn a blind eye to the banking sector that had been bearing the brunt of the negative interest rates regime.

Even if the BoJ choose to leave things unchanged in the upcoming meeting, which is very likely given the recent stabilization in geopolitical conditions and the limited toolbox, we may be seeing the BoJ maintain the dovish stance at the very least that should help to keep the USD/JPY supported. New growth and inflation forecasts are also expected to reflect the moderating conditions that likewise builds the BoJ’s dovish inclination.

Looking at USD/JPY, we have seen prices shooting past the $108 level into October to test the $109 handle ahead of the BoJ meeting. This comes on the back of the abovementioned slew of factors, particularly the improvement in the mood surrounding the US-China trade issue. The potential for the BoJ to go ahead with a pre-emptive move keeps the bias on the upside towards the $110 handle, but any disappointment may see measured reaction. Support comes in immediately at the $108.83 resistance-turned-support ahead of $108.19.