Bank of Japan (BoJ) preview: Clarity to be sought on any year-end rate hike

What to expect at the upcoming BoJ meeting?

The Bank of Japan (BoJ) is set to hold their monetary meeting across 30 – 31 October 2024.

Having raised its short-term policy target to 0.25% from a zero-to-0.1% range back in July, the central bank has taken on a more patient stance ever since. In its September meeting, it kept rates on hold while signalling for no immediate rate hikes.

Ahead, the BoJ is widely expected to maintain its wait-and-see next week, with no change to policy settings. The central bank has been making gradual progress in tapering its bond purchases as well, as part of its broader efforts to normalise monetary policy after years of ultra-loose measures. That should be set to continue, in line with its previously outlined plans to reduce its monthly purchases of Japanese government bonds (JGBs) to around 3 trillion yen per month by early 2026.

Strong policy guidance unlikely ahead of US elections

While a policy inaction next week should not be a surprise, there are some expectations for the BoJ to make a move by the end of this year, with a 0.10% December rate hike currently priced at a coin flip.

This will keep market participants on their toes for any verbal cues from policymakers to provide the much-needed validation. Sticking to their usual script of being data-dependent and retaining caution in normalising policies may call for a dovish recalibration in rate expectations to price for an early-2025 rate hike instead, which may translate to some near-term downward pressure on the Japanese yen.

Thus far, recent comments from the BoJ Governor Kazuo Ueda did not seem to suggest any strong policy commitment ahead, with him saying that it is "still taking time" to sustainably achieve its 2% inflation target. Uncertainties around the upcoming US election should also deter policymakers from making any strong guidance, with policymakers potentially choosing to wait for more clarity in upcoming trade relations with the US.

Attention on fresh economic forecasts to sway views around rate-hike timeline

Fresh economic projections will also be scrutinised for any hints on the timeline of upcoming rate hikes. In September this year, Japan’s annual inflation rate has eased to 2.5% from the 3.0% prior, coming in line with its FY2024 forecast. While government subsidies in utility costs may help in keeping pricing pressures down, weakening in export growth has been a strong factor as well, which may call for some reservations in raising rates too soon.

How Governor Ueda addresses the balance of risks between inflation and growth will be in focus. While some wage growth has been observed, particularly among small and medium-sized enterprises, concerns about declining consumer demand due to rising costs should continue to linger.

USD/JPY: Widening US-Japan bond yield differentials give traction to carry trades

US-Japan bond yield differentials have widened significantly over the past month, with the 10-year bond yield spread back at its highest level since July this year and aiding to lift the USD/JPY to an almost three-month high.

This comes as the BoJ’s reluctance to raise rates contrasts with the Federal Reserve (Fed)'s hawkish communications, while the US dollar has also found much traction on robust US economic data and market participants leaning into the Trump trade.

Thus far, the pair has overcome the 200-day moving average (MA) and an upward trendline resistance, validating buyers in strong control. Its daily relative strength index (RSI) has also traded above its mid-line back in early-October for the first time in three months. Trading in line with the broader upward trend may leave the 154.90 level on watch next. On the other hand, any close below 23 October low may mark a reversal back below the 200-day MA, which may leave the 149.20 level on watch for any support.

Nikkei 225: Upward trendline support on watch ahead

The Nikkei has rolled over recently after touching a three-month high, failing to tap on the weaker yen in what has been a usual bullish catalyst. Any dovish takeaway from the upcoming BoJ meeting may be supportive of Japanese equities, but risk-taking may likely remain limited amid US election uncertainties. For now, an upward trendline connecting higher lows since February 2023 may be on watch as potential support around the 36,124 level.