What to expect from Bank of Japan❓

US CPI report and FOMC policy announcement stole the show yesterday. Lower-than-expected CPI data triggered strong dovish reaction in the markets, and while new 'dot-plot' from FOMC was rather hawkish, it was not hawkish enough to offset those market moves. However, this is not the end of top-tier central bank events this week - traders will be offered policy announcement from Bank of Japan during the upcoming Asia-Pacific session (usually between 3:00 am and 5:00 am BST). Let's take a quick look at what Bank of Japan may do!

What markets expect?

Bank of Japan is widely expected to keep its policy rate unchanged in the 0.00-0.10% target range at this week's meeting. Such an outcome is expected by all of 58 economists surveyed by Bloomberg. Money markets less than 5% chance of BoJ delivering a rate hike at a meeting tomorrow. 

However, Bank of Japan may decide to make changes to its bond purchases. Namely, there is growing expectation that BoJ will decide to slow the pace of bond purchases from current monthly pace of 6 trillion JPY (around $38.2 billion). More than half of economists surveyed by Bloomberg expects BoJ to trim bond purchases.

Money markets pricing in less than 5% chance of Bank of Japan rate hike tomorrow. Source: Bloomberg Finance LP

Too early for another rate hike

Japanese inflation has slowed significantly recently but remains above target, what gives BoJ room to tighten policy. However, GDP contracted in the first quarter and the economy needs monetary support rather than tightness. This will make it hard to justify rate hike just yet and Bank of Japan is expected to tighten policy by trimming bond purchases. Trimming of the balance sheet was already announced earlier this year by BoJ, but traders will look at the pace of reduction. Bank of Japan currently purchases bonds worth 6 trillion JPY (around $38.2 billion) monthly. A reduction to between 4 and 5 trillion JPY is expected, with any cut bigger that being a hawkish scenario.

Also, any hints on the next rate hike will be also watched for. Markets are currently pricing in an over-60% chance of a 10 basis point rate hike in July. Confirmation or strong suggestions of the July hike will support Japanese yields and JPY. However, it is unlikely that Bank of Japan will commit to any rate path for the second half of the year and will rather maintain a wait-and-see approach. Markets are pricing over 20 basis points of tightening by the end of 2024.

A look at EURJPY chart

EURJPY has halted the main upward move and launched a downward correction. Taking a look at the chart at H1 interval, we can see that pair has been trading lower after three failed attempts at breaking above 170.70 resistance zone. However, a short-term downward trendline and 200-hour moving average (purple line) have been broken recently and the pair tested 170.00 resistance later on. Bulls failed to sustain momentum and the pair corrected but recovered part of the losses after a successful retest of the 200-hour average. 

A hawkish surprise from Bank of Japan, like large reduction in bond buying and confirmation of July hike, may provide some support for JPY and push EURJPY back below the 200-hour moving average. On the other hand, dovish surprise, like for example no change to pace of bond purchases, may weaken JPY and push the pair towards recent highs above 170.00.

Source: xStation5