Bank of Japan (BoJ) preview: First meeting helmed by new Governor to bring focus to any exit plans

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

New BoJ Governor Kazuo Ueda will chair the upcoming policy meeting and all eyes will be on watch for further clarity on how he intends to exit from Japan’s ultra-easy policies eventually. For now, market expectations are still firmly leaning towards no rate hike over the next four meetings.

The still-dovish take comes on the back of the lack of any upside inflation surprise over the past five months, which provides some room for the BoJ to maintain its wait-and-see. The new Governor has also been repeating that he expects inflation to fall below 2% later this year, which reflects less urgency for a policy shift now. Recently, he has defended the BoJ’s ‘transitory’ take on inflation, saying that the inflation target has not been achieved in a sustainable way.

Policy shift is still a question of when, not if

Developments from the annual wage negotiation season (Shunto) saw Japanese major companies responding to the rising costs of living with average wage hikes of 3.8% for the coming fiscal year. This is the largest raise in about three decades and a 3% wage growth was previously laid out as a precondition to tighter policies.

Furthermore, the pressures on Japanese Government Bond (JGB) remain, keeping the BoJ trapped in its endless process of aggressive bond purchases, which may be unsustainable over the longer term. If pressures on JGBs persist, further widening of the yield curve control (YCC) policy band to +/-0.75% remains on the table over the coming months to buy some time, while laying the groundwork for an eventual end to its YCC and negative interest rates.

Quarterly outlook report to provide clues on timeline for policy shift

At the upcoming meeting, a fresh set of economic forecasts from the BoJ will be in focus, with speculations that consumer prices may be projected to rise by around 2% in fiscal 2025 from a year earlier. While market expectations are for the BoJ to eventually make changes to its accommodative policies at some point, a below-2% inflation forecast by fiscal year 2025 will likely be looked upon with dovish eyes by supporting a low-for-longer stance.

The reverse may be true, with any forecast above the central bank’s 2% inflation target for fiscal 2025 likely to deliver a hawkish surprise by translating to more urgency for a quicker policy shift.

USD/JPY: Guided by near-term ascending channel pattern

A renewed narrowing in 10-year yield differential between the Japan and US government bonds has translated to some strength in the USD/JPY (大口） in recent weeks, with the formation of higher lows seemingly putting an ascending channel pattern in place. That said, given the impending policy convergence between the US Federal Reserve and the BoJ, recent recovery could still be a wider consolidation for another leg lower.

Further upside could leave the 138.00 level as a key resistance to overcome, where a key 200-day moving average (MA) stands. The pair has failed to overcome the MA line on various retests over the past six months. On the other hand, any breach of the lower channel trendline support could potentially leave its 2023 low in sight at the 126.84 level.

Nikkei 225: Back to retest 2023 high

Overall, the Nikkei 225 seems to be stuck in a ranging pattern over the past one year, bouncing within the 27,600-28,700 range as a reflection of wider indecision. A recent upmove points to a retest of its 2023 high at the 28,700 level, where a successful upward break could validate its ongoing upward trend and leave the 29,200 level on watch next.

On the downside, a series of support levels are in place to support a higher low in the event of a retracement. This includes its 50-day MA, a horizontal support at the 27,600 level and an upward trendline. For now, it seems that a breakout of the long-ranging consolidation pattern needs to be warranted to provide greater conviction of either buyers or sellers in control.