The Bank of Japan (BoJ) is expected to keep interest rates unchanged at 0.75%. The central bank will also release its Outlook Report, which is expected to show an upgrade to growth given the expansionary fiscal policy and potentially a slightly upward revision to inflation.
The focus will be on Governor Ueda's forward guidance, but there's a chance the central bank surprises with a trim in the pace of the BoJ's tapering of bond purchases. This move would be in response to the fast rise in long-term bond yields. The BoJ has been suppressing yields for over a decade through its large quantitative easing programme, and as it began to gradually move away from that policy, yields started to rise at an accelerating pace.
Such a move would help the bond market, but it would likely be detrimental for the Japanese Yen. If the JPY sinks too much too fast, we could finally see an intervention as the USD/JPY exchange rate would likely jump above 160.00 on BoJ's announcement. Interventions don't fix the problem though, so the BoJ will need to raise rates faster or more than expected to really stop the bleeding. Unfortunately, that would also trigger a selloff in the stock market. They are in a very tough spot...
If the BoJ trims the pace, I would expect a rally in long-term JGBs and the Nikkei. These two would be the most straightforward plays. The Japanese Yen will likely drop across the board on the announcement, and then traders will need to watch out for a potential intervention if USD/JPY rises above 160.00, which is the level that triggered two interventions in 2024.
During the press conference, traders will be focused on Governor Ueda's forward guidance and whether he opens the door for a rate hike at the next meeting or if he signals a faster pace of rate hikes. He will certainly touch on the weak yen and talk about how it could influence their policy normalisation, which is what the Bloomberg's report mentioned last week. A more hawkish language would help the yen and put downward pressure on the Nikkei.
