This post dissects the Bank of Japan’s (BoJ) upcoming policy decision, focusing on whether a rate hike signifies a more hawkish stance.
Key Points:
- Interest Rate Hike Likely: The BoJ is expected to raise rates, influenced by strong wage gains and prior hints. However, it’s unclear if this will be a one-time move or the start of a series of hikes.
- Wage-Price Inflation Dynamics: The BoJ may be cautious about further hikes due to a lack of clear evidence that wage growth is translating to significant inflation. See BOJ Report
- Policy Implications:
- Rate Hikes: Likely a single hike for now.
- Yield Curve Control (YCC): The BoJ might maintain YCC (or a similar quantitative easing program) even with a rate hike, unless they significantly reduce bond buying.
- ETF Purchases: These are likely to be discontinued as they don’t make sense in a high market environment.
- Market Expectations and USDJPY: The BoJ faces a challenge. Hiking while not explicitly confirming market expectations of further hikes could lead to a temporary strengthening of USDJPY (a false break) followed by a reversal. This is similar to what happened after the BoJ’s previous adjustments.
Overall, we suggest a cautious approach by the BoJ. A rate hike is likely, but the extent of their hawkish shift remains unclear.