Bank of Japan (BoJ) preview: Clarification to be sought for BoJ Governor’s previous comments

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

The BoJ is set to hold their monetary meeting across 21 – 22 September 2023, with wide consensus for its short-term interest rate target to be kept unchanged at -0.1% and that for the 10-year bond yield around 0%.

But with the BoJ Governor Kazuo Ueda floating the idea that the central bank could have enough data by year-end to determine whether to end negative rates, market participants seem to perceive it as an imminent rate raise into early-2024. The absence of fresh economic projections at the upcoming meeting may leave greater weight to the communications at the press conference to determine if such timeline of a policy pivot is validated or market participants could have potentially misinterpreted Kazuo Ueda's previous comments.

Current market rate expectations are leaning towards a 55% probability that the BoJ may end its negative interest rate in the first quarter of 2024. With that, any upward build in wage pressures towards the rest of the year will be on watch to determine if the central bank’s ‘sustainable wage growth’ condition for a policy change is met.

Japanese 10-year bond yields at fresh nine-year high, but policy normalisation may be gradual

A fresh nine-year high in Japanese 10-year government bond yields reflects hawkish expectations in place for an eventual policy normalisation, but current muted moves in the implied volatility for the 10-year government bonds futures suggest that any policy changes may not take place at the upcoming meeting potentially just yet.

Instead, market participants will be keeping an eye on any further tweaks in tone coming from the BoJ Governor Kazuo Ueda. Back at its July meeting, he guided for more flexibility around its yield curve control (YCC) scheme, referring to the plus-minus 0.5% band around its 10-year bond yields target as just “references”. The central bank has also offered to purchase 10-year Japanese Government Bonds (JGB) at 1.0% every business day through fixed rate operations.

Given that the BoJ still emphasised on patience in its policy stance, phasing out its YCC policy may still be a gradual process in their view, which may call for some wait-and-see at the upcoming meeting given earlier tweaks in July. This is further supported by recent moderation in wage pressures, which does not provide any conviction around the condition of sustainable wage growth just yet.

While Japan’s core-core inflation has remained sticky at 4.3% in July, but excluding energy costs, the other core segments are still on a broadly moderating trend, offering some room for policymakers to hold their fire, at least for now. In July, Japan’s core inflation came in at a four-month low of 3.1% year-on-year.

USD/JPY: Heading to a new year-to-date high

The USD/JPY has registered a new year-to-date high this week, with the pair surpassing the 145.00-145.80 range, where the BoJ had intervened with US$19.7 billion of yen-buying back in September 2022. That has prompted speculations of more intervention, although any excitement could easily die down without the lack of any concrete follow-through.

Having traded in an upward channel since the start of the year, further Federal Reserve-Bank of Japan (Fed-BoJ) policy divergence displayed this week may leave a retest of the 150.00 level in sight, as a key resistance to overcome. This is where the upper channel trendline resides, while it also marks a key psychological level where the BoJ intervened with a larger US$42.4 billion worth of yen-buying in October 2022, which triggered the formation of a near-term top for the USD/JPY.

On the downside, the 145.80 level will serve as an immediate support level to hold. Staying above its Ichimoku cloud pattern and various moving averages (MA) on the daily chart still leaves an upward trend intact for the pair, although recent lower highs on relative strength index (RSI) may point to some near-term exhaustion/indecision for now.

Nikkei 225: Bullish flag formation remains in place

After a short blip early this month, the Nikkei 225 index has seemingly found support off the lower edge of its Ichimoku cloud on the daily chart to trigger a break above a near-term descending channel consolidation pattern. On the broader scale, a bullish flag formation seems to remain in place.

Any pushback against recent hawkish bets at the upcoming meeting could likely be met with a positive reaction in the index, which may leave its year-to-date high at the 34,000 level on watch for a retest ahead. On the downside, the upper channel trendline may now serve as a resistance-turned-support at the 32,800 level for buyers to defend.