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Analysts at Danske Bank, do not expect the Bank of Japan to change its policy at the July meeting, but they see that the likelihood of a policy adjustment (fine-tuning) during the third quarter has increased significantly.

Key Quotes:  

“The upcoming monetary policy meeting on 30-31 July has suddenly become much more interesting after several media sources (such as Reuters on 20 July and Nikkei on 22 July) reported over the weekend that the BoJ might consider modifying and possibly adopting a more flexible monetary policy at its July meeting. The main argument behind a possible change in the BoJ’s policy is related to concerns about the adverse effects of its current monetary policy, in particular on financial institutions. Such side effects have been mentioned by several BoJ members and have been debated intensively since Governor Haruhiko Kuroda fuelled speculation last year about BoJ normalisation with his remarks on the so-called reversal rate.”  

We do not expect the BoJ to change its policy at the July meeting, but the likelihood of a policy adjustment (fine-tuning) in Q3 has increased. The first reason why we do not expect a change in policy is the current slump in inflation, where the nationwide CPI excluding fresh food and energy (BoJ’s core CPI measure) gained only 0.2% y/y in June from 0.3% y/y in May and versus consensus of an increase to 0.4% y/y. Indeed, it is widely expected that the BoJ will lower its inflation forecast in its Quarterly Outlook Report, which is due to be released together with the policy announcement on 28 July. In our view, it would be very difficult for the BoJ to explain a policy change that might lead to higher interest rates and a lower inflation forecast at the same time.”

“Secondly, while we would expect any changes in the policy to be accompanied by soft wording in the statement, including a reassurance that the change is not a tightening of the  monetary policy in the sense that it is meant to close the output gap, we are very sceptical  that the BoJ would be able to avoid fuelling normalisation speculation if it hikes the 10Y yield target, for example, at this stage.”