BoJ likely to keep its monetary policy unchanged – Danske Bank

Research Team at Danske Bank expects the Bank of Japan (BoJ) to keep its monetary policy unchanged at its two day monetary policy meeting ending on 16 March.

Key Quotes

“This implies the BoJ will maintain its target for the short-term policy interest rate unchanged at -0.1% and will continue to purchase Japanese government bonds (JGBs), so yields on 10Y JGB remain around 0%. As such, we expect the BoJ to remain on an easing bias but we think it would require significant negative inflation or growth surprises for the BoJ to ease further. It is widely expected that the BoJ will stay put this time and this should not cause significant price reactions.”

“USD/JPY has traded higher in recent weeks and yields on 10Y JGBs are currently trading close to what we assume is the upper end of the fluctuation band of +/-10bp around 0%. The main driver behind recent JPY weakening and the increase in 10Y yields has been rising expectations of a Fed rate hike in March.”

“As we expect US and global yields to continue higher in coming months, the BoJ’s 0% target for the 10Y yield could come under increasing pressure. Hence, we expect focus at this BoJ meeting to be on whether the BoJ changes its forward guidance in relation to the inflation overshoot commitment that the BoJ presented in September. We expect investors to look for indications of whether the BoJ could eventually consider lifting its target for the 10Y yield before inflation reaches 2% in a stable manner.”