The Bank of Japan has key decisions to make tomorrow. In fact, this meeting is seen as more important than the FED meeting by the market since the range of policy options that could be undertaken by the BOJ is wider.
This is where the BOJ assesses the quantitative easing program and the negative i-rate policy and there could be a surprise. The following options might be considered:
- The negative interest policy goes even more negative,
- QE is structured so that the yield curve steepens. This would benefit the stock market and hopefully weaken the Yen.
- Do nothing.
Credibility regarding the inflation target of 2% and the future of the interest rate policy are on the line. Thus, the wording of the statement could shift future expectations.
What is likely to happen is that there is a shift towards shorter dated government bonds from the current 7 to 12 bonds that the BOJ is buying. This will result in a steeper yield curve making it better for banks. Currently, this is priced in by the financial markets, so if it does not happen it would result in volatility.
There is also expectations that the negative rate policy will get even more negative.
This has implications for the Yen. I believe they will cut rates to make them even more negative, thus causing the Yen to weaken. This might happen with some type of asset purchasing program towards the shorter maturities to somehow ease the pain on the banks.
The market is mixed on the rate cut potential. In a Wall Street Journal article (20 September 2016) titled: ‘Why the Bank of Japan’s Meeting is a Wildcard for Global Markets,’ four banks (Deutsche Bank, BNP Paribus, Credit Suisse and Citigroup) think rates will stay on hold. Whereas, four banks see a rate cut to -0.7%. These banks are Morgan Stanley, J.P. Morgan, HSBC and UBS. I agree with these banks but also see a steeper yield curve scenario.
Of course these are lower rates and a steeper yield curve are opposite goals, but I think the BOJ will try to accommodate a wider range of interests. Thus the steepening might just be a statement to stroke expectations.