News Headline Summary

Bank of Japan policy statement preview

Analysis details:
• The target rate currently stands at 0.10% which is expected to be unchanged
• Expand asset purchase program by JPY 10trl to 111trl
• Increase inflation goal from 1.0% to 2.0%

BoJ meeting - 2300GMT/1700CST
Policy statement - 0200-0400GMT/ 2000-2200CST
Rate decision - 0300-0330GMT/ 2100-2130CST.

Since the arrival of the Abe administration in late December, volatility in JPY has increased considerably and much of the weakness has been down to domestic consideration. Ahead of the BoJ’s meeting, there have been increasing expectations for further monetary easing, which have been heightened since JPY 10.3trl fiscal stimulus package approved by Abe’s government on the January 11th, which also urges the Bank of Japan to take bolder steps accompanying the fiscal stimulus to end deflation.

The potential easing steps by the BoJ:
The Bank of Japan is to increase its inflation goal from 1.0% to 2.0% and to exclude ‘long-term’ in timeframe to achieve the target as a result of pressure from PM Abe, who warned that a long-term target would be useless. A long term target would give the BoJ less motivation to act in the short term and Japan’s economy needs immediate attention to pull it out of recession. It is worth noting that the Japanese Current Account for November came at JPY -222.4bln vs. Exp. JPY -17.1bln (Prev. JPY 376.9bln), which was the first deficit for 10 months.

The Bank of Japan is to expand the asset purchase programme by JPY 10trl. There were source comments suggesting the BoJ is also to buy assets open-endedly until 2% inflation is reached. Last December, the BoJ decided to boost its APP by JPY 10trl to JPY 101trl. Additional action at this meeting would be the first back-to-back measures since May 2003.

The Bank of Japan is to mull scrapping its 0.1% floor on short-term interest rates however such steps would surprise the markets as the BoJ has kept the rate unchanged since January 2009.

A joint statement between the government and the Bank of Japan is also expected to be issued, as Japanese economic minister Amari said that it is necessary to share common policy goals between the government and the BoJ and strengthen cooperation. In addition to that, the Nikkei also reported recently that the government and BoJ officials have reached a basic agreement on the basis details of a joint statement on fighting deflation.

If the BoJ fail to mention anything of the above it could be a large disappointment for the markets resulting in some significant strengthening in the JPY allied with weakness in JGBs.
There are a couple of outside chances to be aware of, one possibility cutting the interest on excess reserves (IOER) below 0.10%. Another option is that the central bank could buy more foreign bonds.

21 Jan 2013 - 23:10 - Fixed Income - Source: RANsquawk

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