The Bank of Japan will make a decision on interest rates tomorrow in the first part of the day. Currently, investor expectations indicate nearly a 70% probability of a 10 basis point rate hike to 0.20%. However, uncertainty remains high, as evidenced by the significant volatility in expectations over the past few days. Furthermore, the BOJ will begin tapering its bond purchases, further reinforcing the market belief that the era of dovish monetary policy is over.
It is worth noting, however, that despite hawkish expectations, the market is still not fully convinced about the certainty of the changes coming from the BOJ tomorrow. Just today, in the first part of the day, the probability of a 10 basis point rate hike was only 50%.
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The swap market predicts that the target interest rate will rise in July to 0.15-0.25% from the current 0.0%-0.1%.
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On the other hand, the majority of investment bank analysts support maintaining rates at their current level.
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Approximately 37 economists predict no change, 2 support a 10 basis point hike, 6 support a 15 basis point hike, and one analyst supports a 20 basis point move.
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Moreover, the market expects the presentation of a plan to taper the bond purchase program and guidance on further interest rate hikes.
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Governor Kazuo Ueda said in June that the reduction in bond purchases would be "significant," signaling readiness for a rapid reduction in the BOJ's balance sheet.
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We expect the BOJ to cut monthly JGB purchases to 4.5 trillion yen from 6 trillion yen, reducing them to 2 trillion yen over the next two years. Analysts suggest cuts to as low as 5 trillion yen.
NHK speculation changes expectations
Although the stance of most analysts is to keep rates unchanged at 0.10%, today's speculation fuelled by the NHK newspaper allows for a hike scenario of up to 0.15%. According to information sources from insiders closely related to the BoJ, the Bank is allegedly debating a hike to 0.25%. Opinions are said to be divided and cautious among board representatives. Bankers want confirmation of the maintenance of negative real wages. In addition, the BoJ is expected to decide on a concrete plan to reduce government bond purchases. However, the details will be revealed at tomorrow's decision.
The potential for further appreciation of the yen is considerable, looking at the still extremely large number of short positions and the lowest net positioning in history. The current situation is reminiscent of 2006-2007, when the yen also weakened to extreme lows and then gained until 2012, thus starting a bull market on the yen. Source: XTB
USDJPY
A possible interest rate hike in Japan and an impending interest rate cut in the US will narrow the gap between the two economies, which could have a positive impact on the value of the yen and the decline in the USDJPY. However, the Bank has so far shown several times that it is in no hurry to tighten monetary policy in the country. Such rhetoric from the Bank leaves investors in uncertainty. This can be confirmed by the high volatility of expectations surrounding tomorrow's decision over the past few days. As a result, we have seen a lot of nervous movement on the USDJPY chart. Currently, the rate has stabilized around the 153.0000-154.0000 zone in anticipation of tomorrow's decision.
The pair is currently testing the zone of the 200-day exponential moving average. Such a retest on the pair has not been seen since January this year, when another upward cycle began on the USDJPY pair. Source: xStation
