Bank of Japan (BoJ) preview: On hold for vaccines

BoJ caught between a second state of emergency and vaccine wait

The consensus expectation continues to see the BoJ hold monetary policy unchanged into 2021, with policy rate expected to stay in negative territory at -0.1%. The negative interest rate policy (NIRP) will be coupled with yield curve control (YCC), whereby 10-year JGBs yield target would be maintained at around 0.00%. This had been the monetary policy regime established since September 2016 and may well remain the setting through 2021.

Enhanced measures including asset purchases and liquidity injection had meanwhile been noted into 2020 with the Covid-19 pandemic hit. These measures are expected to stay through most of 2021, although the BoJ had updated in their December 2020 meeting that the various measures may be reviewed with findings made public in their March 2021 meeting.

Given the renewed state of emergency, the Japanese economy is expected to see deterioration in economic momentum that may eventuate in only minor changes in the upcoming March review, if at all. At the same time, few are looking for further support on the BoJ’s end between now and March despite the resurgence of Covid-19 cases and the accompanying movement restriction advices. This is with the vaccine distribution wait that could begin as early as February for Japan to eventually see to recovery taking off.

One area whereby change may be keenly expected would be the Bank of Japan’s outlook report with a downward revision of growth likely with the renewed state of emergency seen into January. GDP estimate for fiscal 2020, which ends March 2021, may be revised lower from the current -5.5% year-on-year consensus. Broadly, the fact is that the Bank of Japan also has little room to manoeuvre as they wait out the Covid-19 storm and for the vaccines to arrive and clear the clouds.

USD/JPY vulnerable to bond yields movements

USD/JPY (大口） had inched up to start the year as a result of the rising US Treasury yields. 10-year US Treasuries had shot above 1.0% shortly into 2021 and oscillated 1.1% levels into mid-January. This had widened the spread with 10-year JGBs and thus having the differentials driving up the USD/JPY pair.

That said, prices had remained in the multi-month downtrend channel awaiting fresh leads. A continued rise in US yields could see the USD/JPY pair test the downtrend resistance here and a break could signal a deviation from the current trend. Such a scenario would more likely be driven by US leads including the passage of the $1.9 trillion rescue plan unveiled by President-elect Joe Biden ahead of his January 20 inauguration.

Given the ongoing pandemic and the Fed’s stance, however, the bias remains towards only a moderate climb for US yields from where it is currently situated. As such, prices may find the path of least resistance being sideways with immediate support at 102.60 and resistance around 104.40 levels.