BoJ Preview: Three 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.

Hawkish (10%): Complete removal of YCC

The BoJ scraps YCC and sets the stage for the end of NIRP as the virtuous cycle of price and wage hikes is taking off. The Bank is likely to shade up the FY24 core inflation forecast but more importantly, the FY25 core inflation forecast may have a 2% handle (prior: 1.6%) to reflect the exit from Japan's deflationary past. USD/JPY -2.5%.

Base Case (55%): Raise in upper ceiling to 1.5%

The BoJ widens the upper end of the reference range for 10y JGBs from 1% to 1.5% and potentially increases the rate of its fixed rate purchase operations. The Bank could signal that this tweak is a preemptive move again given the upside risks from wages and prices. Implicitly behind the tweak, the BoJ is likely cognizant that it’s a tough battle to curb the rise in yields given offshore moves, and real rates may become too accommodative as a result of the shift higher in inflation expectations. Ueda could take this chance to set the ground for an end to YCC in Dec and the end of NIRP in Jan'24. USD/JPY -1%.

Dovish (35%): No change to YCC settings

BoJ keeps YCC settings unchanged and reiterates that there is some distance before the 2% price goal is in sight. The Bank may retain its FY24 and FY25 core inflation forecasts <2% to drive the message that the current inflationary pressure is transitory and unlikely to last. USD/JPY +0.5%.