Bank of Japan Preview: No changes expected as policymakers keep the wait and see mode

• The Bank of Japan is likely to maintain the YCC and rates unchanged. 
• BoJ’s Governor Kazuo Ueda is unlikely to signal a pivot timeline.
• USD/JPY has room to retest the multi-year high at 151.94. 

The Bank of Japan (BoJ) will announce its monetary policy decision first thing Tuesday. As usual, the central bank is widely anticipated to maintain its interest rates unchanged with the main benchmark to remain steady at -0.1%, despite inflation in Japan has been above the central bank’s 2% target for almost two years. Additionally, policymakers will likely maintain the Yield Curve Control (YCC) untouched, which currently allows the 10-year Japanese Government Bond (JGB) yield to rise to around 1.0%.

Bank of Japan Interest Rate Decision: What to know in markets ahead of the announcement 

The Japanese Yen (JPY) has been on the back foot since March 2022, with the USD/JPY pair soaring to a multi-year high of 151.94 in October 2022. The JPY recovered throughout November and December, when the BoJ tightened the monetary policy “de facto” by increasing its tolerance on long-term yields. Back then, speculative interest believed Japanese authorities were at the first stages of dropping the ultra-loose monetary policy. Yet as 2023 went by, the pair resumed its advance as Governor Kazuo Ueda gave no signs of pivoting. Heading into the decision, the pair trades at around 148.00. 

Meanwhile, the Japanese core Consumer Price Index (CPI) rose 2.3% in December 2023, slowing from 2.5%  in November and posting the lowest reading since June 2022. The figures further undermined the odds of a shift in the current monetary policy, furthermore considering policymakers refrained from acting when CPI pressures were much higher. 

Another factor contributing to the central bank’s decision is wage growth. Wage growth is a critical part of price pressures, as salary increases usually trigger inflationary concerns. In fact, the lack of wage growth partially explains Japanese stagnation and the decision to adopt an ultra-loose monetary policy back in 2016.

Through most of 2023, Japan experienced the fastest wage growth in decades, spurring confidence over a potential monetary policy shift. However, inflation-adjusted real wages fell 3% YoY in November, accelerating the slump after losing 2.3% in October.  All in all, the BoJ has no reason to change its monetary policy path, moreover considering policymakers have remarked that higher wages are a prerequisite for moving away from monetary stimulus.

When will the BoJ announce its interest rate decision, and how could it affect USD/JPY?

As said, the Bank of Japan is unlikely to change the ongoing policy. The central bank will likely maintain the main rate benchmark at -0.1% and the YCC at its flexible current levels. Even though the central bank is inclined to make announcements by surprise, the chance of an unexpected statement this time is pretty much null. 

Market participants will be looking for Governor Kazuo Ueda's words, although he has cooled down his tone ever since taking office. Ueda pledged for a “quiet exit” in mid-2023 and is clearly on such a path, with no rush to introduce changes. 

On a positive note, Governor Ueda said that prices and wages appeared to be moving in the right direction in December, although he added that conditions remained uncertain. Uncertainty has likely increased after Japan was hit by a heartquake at the beginning of the year, prompting policymakers to retain the wait-and-see stance.   

The JPY will react accordingly to BoJ’s guidance. If the central bank hints at a change in monetary policy, the local currency will likely appreciate. The opposite scenario would occur if policymakers offered a conservative tone, without hinting at potential rate hikes, even without clearly defining a date.

From a technical perspective, Valeria Bednarik, Chief Analyst at FXStreet, notes: “Given expectations of an on-hold BoJ and recent US Dollar strength, USD/JPY could surge following the announcement. The pair hit 148.80 mid-January, an immediate resistance level and a potential bullish target should the central bank offer a dovish stance. Technical readings in the daily chart suggest the pair is correcting overbought conditions, but the downside seems limited. The pair is developing above a flat 100-day Simple Moving Average (SMA) that is providing dynamic support at around 147.50. Technical indicators retreat from their recent highs but remain far above their midlines. Finally, a bullish 20-day SMA maintains its positive slope after crossing above an also bullish 200-day SMA.”

Bednarik adds: “The USD/JPY pair would need to extend its slump through 146.60 to become bearish and post a most sustained slump towards 145.00. However, such a scenario seems unlikely. Investors are also focusing on the US earning seasons, with Wall Street set to post record highs in the upcoming days. Stronger equities tend to underpin USD/JPY, limiting chances of a steeper decline.”