Bank of Japan (BoJ) preview: More clarity to be sought around bond-buying cuts

What to expect at the upcoming BoJ meeting?

At the upcoming meeting, the Bank of Japan (BoJ) is widely expected to keep its short-term interest rate unchanged at 0.0% - 0.1%. It was a unanimous decision to keep policy settings on hold back in April, but given that broad expectations were for the central bank to hike rates further as soon as July, eyes will be on whether policymakers will still be so united this time round. Overall, markets are leaning towards two rate hikes by the end of this year and any slightest step away from the central bank’s usual dovish tone will be sought for validation.

Policymakers have also been debating on reducing the central bank’s government bond purchases for some time, with more clarity expected to be provided at the upcoming meeting in terms of the timing and scale. Just this week, BoJ Governor Kazuo Ueda has reaffirmed the intention to slow its bond-buying process, seemingly setting the stage for an upcoming guidance.

Any reduction will likely be taken with caution however, so as to avoid any overreaction in bond yields and to maintain the central bank’s current stance for a more gradual pace of policy unwinding. A likely scenario may be a decrease in monthly bond purchase to JPY5 trillion from the current JPY6 trillion, while the central bank may continue to guide for a high degree of data-dependency to retain some policy flexibility. In this situation, market participants may take the gradual policy normalisation in stride, which may see the Japanese yen lower while Japanese equities find traction.

Virtuous wage price spiral remains in the works

Following a promising “shunto” wage negotiations earlier this year, Japan’s nominal wages for April has jumped 2.1% year-on-year, accelerating from a 1% increase prior and exceeding consensus for a 1.7% gain. This seems to make the virtuous wage-price spiral, which the central bank seeks for, more apparent.

Having previously guided that the BoJ will raise rates further if the trend inflation heads towards 2%, that will leave eyes on how much the higher wage growth will feed into inflation and the level at which pricing pressures may stabilise. For now, while inflation has been coming in above the central bank’s 2% target, the core aspect has slowed for the second straight month in April, which may call for more leeway in assessing future data.

USD/JPY: Intervention efforts met with market dip-buying

Previous intervention efforts from Japan authorities to support a weak yen have failed to have any long-lasting effect, as market participants continue to favour the carry trade in USD/JPY and drive the pair to pare much of its intervention losses. An upward trend remains intact, with the formation of higher highs and higher lows displayed within a rising channel since the start of the year.

That will leave the 155.00 level on watch for any immediate defending from the bulls, where the lower channel trendline stands in confluence with its daily Ichimoku Cloud support. If the policy divergence between the Federal Reserve (Fed) and the BoJ remains, the likely scenario may be a retest of the 160.00 level, which may drive some reservations on whether the BoJ will intervene at this level once more.

Nikkei 225: Buyers attempting to regain control

After trading in a state of indecision over the past weeks, buyers seems to be taking control with a push above its 39,000 level, where a resistance confluence stands from the upper edge of its daily Ichimoku Cloud and a downward trendline resistance from its March 2024 peak. Its daily relative strength index (RSI) has shown some slight pick-up above the key 50 level as well.

Ahead, buyers may attempt to retest the 39,600 level, with much to revolve around the BoJ maintaining its broadly dovish stance for any go-ahead. On the downside, immediate support may be at the 38,400 level, where the lower base of the consolidation stands.