BOJ to Sit Tight on Policy With Focus on Outlook: Decision Guide

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(Bloomberg) -- The Bank of Japan is widely expected to stand pat Thursday with the focus shifting to the bank’s economic outlook amid rising virus cases and a widening state of emergency that’s likely to throw the recovery into reverse.

All 44 economists surveyed by Bloomberg see the BOJ leaving its main policy tools unchanged at today’s meeting. Some 25% project the bank will take additional steps to ensure companies can get access to credit amid the country’s escalating crisis.

The BOJ is likely to consider downgrading its overall assessment of the economy and could cut its growth forecast for the year through March, according to people familiar with the matter. The central bank’s economic view is already more cautious than the consensus among private economists and any downgrade will widen the gap.

Rising infection rates in Japan last week prompted Prime Minister Yoshihide Suga to widen a state of emergency to cover areas accounting for about 60% of Japan’s economy. Private sector analysts now see gross domestic product shrinking again this quarter.

What Bloomberg Economics Says...

“The main focus for the Bank of Japan will probably be on assessing a changing economic landscape after the government widened a state of emergency to counter a third wave of Covid-19 infections. Policy will likely be on hold at least until the BOJ wraps up a review of its framework in March.”

-- Yuki Masujima, economist

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With a policy review due at the BOJ’s March meeting, traders will watch Governor Haruhiko Kuroda’s comments later Thursday for hints of any policy adjustments to come. Kuroda has said any changes would be more like fine-tuning than an overhaul, but he has a history of delivering surprises.

Read More: BOJ Mulls Stimulus Mechanics as Covid-19 Extends Timeline

The governor usually briefs reporters at 3:30 p.m. in Tokyo. The bank’s policy statement is likely to be released around noon, along with its quarterly outlook report.

What to Look for

  • While economists expect no major changes in the BOJ’s economic projections, this is a rare moment in which analysts are divided on the direction of any tweaks. Some project a growth downgrade next fiscal year due to the virus. Others see the government’s latest stimulus boosting the forecast.
  • Any revisions will offer insight into the BOJ’s confidence in the economy amid the heightened uncertainty of the renewed emergency, which could drag on beyond its current end-date in early February.
  • The BOJ is likely to emphasize downside risks to the economy, drawing a contrast with the more optimistic views of some Federal Reserve officials. A gloomier view could help relieve upward pressure on the yen.
  • Bond traders will look for any comments from Kuroda indicating the likelihood of the BOJ widening the range around its bond-yield target, a change that one local media report said could be considered.
  • The BOJ is expected to announce some adjustments to its purchases of exchange traded funds in its March review. The BOJ has become the biggest single holder of Japanese stocks, so any communication on that front will be closely monitored.

Policy Recap

  • BOJ expects interest rates to remain at the current low level or even lower.
  • A rate of -0.1% on some reserves kept at the bank by financial institutions.
  • Yield target of about 0% for 10-year Japanese government bonds, with a trading range of about 0.2 percentage point on either side of the mark.
  • Will purchase Japanese government bonds as needed and without limit, though the amount of purchases remains secondary to controlling interest rates.
  • A guideline to increase holdings of exchange-traded funds by up to 12 trillion yen ($115 billion) a year. Actual purchases vary from month to month, depending on market conditions.
  • Active buying of corporate bonds and commercial paper with an expanded upper limit on holdings totaling 20 trillion yen.