Breaking the 155 mark, the yen fell to the "bottom line", and the Bank of Japan will be hawkish tomorrow?

As the yen continues to plummet to the "bottom line", how will the Bank of Japan react?

Just five weeks after the Bank of Japan ended its eight-year negative interest rate, the focus of the Bank of Japan at its April interest rate meeting will be to find a balance between supporting the yen exchange rate and economic recovery as the Fed's rate cut expectations continue to weaken and the yen is moving further and further down the path of depreciation, with the yen falling below 155 against the dollar.

The consensus is that the Bank of Japan will remain on hold in April due to its usual cautious approach, keeping its benchmark interest rate between 0% and 0.1%, with the focus on the latest quarterly economic growth and price forecasts.

Nomura pointed out in the report that at the time of the depreciation of the yen, the Bank of Japan's real GDP growth forecasts for fiscal 2023 and fiscal 2024 will be lowered, and the core CPI and super-core CPI forecasts will be revised upward, and the Bank of Japan's views on the outlook for the economy and inflation will also become an important reference for the market to judge the next move of the Bank of Japan.

At the same time, the Bank of Japan is also likely to send a "hawkish signal" on the government bond purchase program to support the yen, and if the statement removes the wording related to bond purchases, the market will prepare for the start of quantitative tightening in the near future. Bond traders are watching for any changes in bond purchase guidance. Morgan Stanley believes that the Bank of Japan may make technical adjustments to the amount of Japanese government bonds purchased each month.

The statement of the governor of the Bank of Japan, Kazuo Ueda, will also be the key for the market to judge the next move of the Bank of Japan and determine the direction of the yen. Instead of emphasizing that financial conditions will remain accommodative when he attended the meeting earlier this week, Kazuo Ueda has repeatedly said that the bank will raise interest rates if inflation trends continue beyond its 2% target, which the market sees as a sign of a possible shift in communication.

UBS said in the note that their focus will be on how the Bank of Japan will communicate the policy outlook at the April meeting, and that the "dovish tone" in March is likely to turn neutral, emphasizing that the future path of interest rates and bond-buying guidance will depend on their risk assessment and confidence in inflation and economic growth, but is unlikely to mention exchange rate movements as the reason for the adjustment.

When will the Bank of Japan act next?

Takeshi Yamaguchi, chief Japan economist at Morgan Stan, believes that Kazuo Ueda made more hawkish rhetoric and that inflation in Japan could rise in the second half of 2024. The Bank of Japan is expected to raise interest rates by 15 basis points in July 2024, bringing the policy rate to 0.25%, and another 25 basis points in January 2025.

Tomoya Masanao, co-head of portfolio management for Japan and Asia-Pacific at Pimco, said the base case scenario for Japan's monetary policy this year is that the Bank of Japan will raise interest rates two more times, and "there is a growing probability that the Bank of Japan will raise its policy rate to 0.25% by the summer and 0.5% by the end of the year"

UBS pointed out in the report that the possibility of a rate hike by the Bank of Japan in July cannot be ruled out, and as the yen depreciates further, this probability has risen from 40% at that time to more than 45%. The Bank of Japan's gradual reduction in government bond purchases is also likely to take place in June before raising interest rates.

Mitsuhiro Furuzawa, Japan's former head of monetary policy, said that if the yen weakens further, the Japanese government will be very close to the brink of monetary intervention, but the Bank of Japan will keep interest rates unchanged until the summer.

At present, some lawmakers of Japan's ruling Liberal Democratic Party said that there may be political opposition to the Bank of Japan's interest rate hike because some important political decisions in Japan are approaching in the next few months (such as the Liberal Democratic Party leadership election in September), and Japan's fundamentals have not yet formed the conditions to support a second interest rate hike.

According to Shoji Nishida, head of Japan's Fiscal Policy Review Headquarters, Prime Minister Fumio Kishida needs to focus on the actual needs to boost the economy, so the Bank of Japan's second rate hike may not come soon.

JPY traders are holding their breath and preparing for possible market interventions and changes in central bank policy in preparation for a possible repeat of the September 2022 scenario. At that time, the Bank of Japan's decision to ease monetary policy triggered a violent reaction in the market. Now, the yen is much weaker than last year, and expectations of a US rate cut are decreasing, and if Kazuo Ueda does not make any hawkish comments, it could be a turning point for the yen.

The Bank of Japan's inflation expectations are in the spotlight

The continued weakness of the yen and the rise in energy costs have brought the Bank of Japan's inflation forecast to the next level of attention.

With oil prices high and wages set to rise by the most in three decades, the extent of the BOJ's revision to inflation forecasts will be watched. According to media reports, the Bank of Japan may set its core inflation forecast for fiscal 2026 at around 2% in its April economic outlook report, and raise its inflation forecast for fiscal 2024 from 2.4% starting in April, and from 1.8% to around 2.0% in fiscal 2025.

Nomura raised its forecast for Japan's CPI inflation over the next two years in its latest report, mainly due to changes in energy prices, a weak yen, and higher-than-expected wage increases in wage negotiations this spring:

Japan's core CPI inflation is forecast to rise again from mid-FY2024, with core CPI coming in at 2.9% (previously expected to be 2.3%), falling back to 1.9% in FY2025 (previously expected to be 1.8%).

In the report, Nomura stressed that the Bank of Japan is not only concerned about the inflation rate, but also about the factors that drive inflation up: whether prices are driven by demand or costs? Is inflation mainly driven by domestic consumption or imports? Is inflation local or more broad? Is inflation short-lived cyclical or longer-term?

Barclays believes that due to the recent depreciation of the yen and the rise in oil prices, the likelihood of an upward movement in commodity inflation is increasing. According to the report, the impact of the USD/JPY exchange rate on core CPI has become more pronounced, and Japanese companies are more inclined to pass on the cost of yen depreciation to product prices.

Ken Kobayashi, director of the Japan Chamber of Commerce and Industry, said at a press conference that the dual effects of rising resource prices and a weaker yen are worrying, and that the "cost-push" inflation, which has been fading recently, is likely to return. Affected by the depreciation of the yen, the living environment of small and medium-sized enterprises, which are already difficult to profit from exports, will be further pressured, and the "wave of price increases" may lead to a "wave of bankruptcies".

There is a view that although the market is widely expected to raise inflation expectations at the BoJ meeting in April, most economists believe that the BoJ's assessment of inflation risks and the degree of certainty of inflation forecasts may hint at the timing of the next rate hike.

Yen depreciation pressure, Bank of Japan "hawkish"?

There is a view that in the face of the "falling yen", although the Bank of Japan will not say it explicitly, it is possible to send a "hawkish signal" on the government bond purchase program to boost the yen.

In its March 19 policy decision, the BOJ said it would continue to buy roughly the same amount of Japanese government bonds as before, and a footnote to its announcement said that it currently buys about 6 trillion yen ($39 billion) of sovereign bonds per month, and that any changes or cuts to these wordings could put upward pressure on long-term interest rates.

Morgan Stanley said in the report that the Bank of Japan may make technical adjustments to the amount of Japanese government bonds purchased each month to provide support for the yen. Nomura Securities believes that the Bank of Japan will remain unchanged on the scale of bond purchases.

Naomi Muguruma, chief fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo, pointed out that the market will closely monitor the "hawkishness" of the Bank of Japan, focusing on whether the Bank of Japan's policy statement will continue to include language about the purchase of Japanese government bonds.

Naomi Muguruma believes that if the Bank of Japan slows down its bond purchases or sends a similar signal, the market will be ready to start quantitative tightening in the near term. Any indication that the Bank of Japan is reducing its bond purchases will put upward pressure on Japanese interest rates, which in turn will provide support to the yen.

At the post-meeting meeting in March, Kazuo Ueda repeatedly said that financial conditions would remain accommodative, and these remarks undoubtedly put pressure on the yen. How he will look ahead to the future policy path and the economic outlook will be key points at this meeting, and if he hints at a further upward trend in prices, he may say more about the possibility of a rate hike.

On 22 April, Kazuo Ueda said the Bank of Japan (BOJ) would raise its benchmark interest rate if Japan's core inflation rises to its 2% sustainable inflation target. A shift in the price outlook and associated risks could be factors that could lead to a change in policy.

Analysts generally believe that Kazuo Ueda is unlikely to comment directly on the yen's movements, but he has repeatedly stressed that a weaker yen could push up trend inflation by boosting import prices.

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