BoJ Preview: Four scenarios and their implications for USD/JPY – TDS

Economists at TD Securities discuss the Bank of Japan (BoJ) Interest Rate Decision and their implications for the USD/JPY pair.

On Hold – Dovish (10%)

The BoJ states that the economy is not strong enough and the Bank needs to be patient judging by the moderation in real household spending and Q4 GDP numbers. Ueda may remark that the BoJ needs to wait for the wage outcomes from small-medium enterprises given that they hire 70% of Japan's workforce. In this instance market is likely to view a July hike as the earliest possible time to move. USD/JPY +1.4%.

On Hold – Hawkish (10%)

The Bank would need to signal to the market that its confidence to hike is high and that its commitment to hike in April is strong. Otherwise, the market will believe the BoJ is likely to be on hold for at least three months. USD/JPY +0.8%.

Base Case: 10 bps hike – Measured tone (60%)

The significant wage outcome from Rengo gives the BoJ the confidence to move in March. Earlier, the BoJ indicated that the policy adjustment to hike will not be rapid, so hiking a month earlier vs consensus should not be a big deal. We expect the BoJ to officially discontinue the Yield Curve Control (YCC) framework, but retain its Q1 bond buying pace. USD/JPY -1.8%.

Hike – Hawkish (5%)

BoJ indicates that current financial conditions are too accommodative and may tighten policy further to prevent real rates from going too negative. Possible actions include faster hikes or a surprise announcement of a QT plan. However, both possibilities run counter to recent BoJ messaging to not surprise the market. USD/JPY -2.7%.