Prospects of the Bank of Japan's interest rate decision: economic assessment may be adjusted, the market pays attention to five key points

The Bank of Japan will announce its interest rate decision on Thursday (October 28). It is widely expected that the Bank of Japan will maintain its stimulus plan unchanged, while hinting that the economic recovery will be further postponed. Despite this, the Bank of Japan’s policy statements and forecasts and the subsequent press conference of Kuroda Haruhiko are still closely watched by investors, and the market will seek clues to interpret its policy stance from five aspects.

The market expects the Bank of Japan to maintain policy unchanged on Thursday, but the economic assessment may be adjusted

All but one of the 49 economists surveyed expect the Bank of Japan to stick to its negative interest rate and asset purchase plan at the end of Thursday’s meeting. It is expected that the Bank of Japan will also lower its economic growth forecast for this fiscal year and raise its forecast for next year.

The Bank of Japan is expected to lower its growth forecast for this year and raise its growth forecast for fiscal year 2022

The latest growth forecast by the Bank of Japan (black) and the latest growth forecast by other economists (pink)

In order to show that Japan’s economic recovery has suffered setbacks, the Bank of Japan may adjust its description of the economy and even clarify its assessment, as it did in January. People familiar with the matter said that in the longer term, the bank may maintain a basic view, insisting that the recovery will continue even after the summer epidemic returns and supply shortages cause delays.

Economist Yuki Masujima said: “The Bank of Japan may lower its inflation expectations to take into account special factors, such as changes in the base year of the CPI series. However, it will be very important to observe how the Bank of Japan assesses the inflation outlook, because it will better interpret it. Policy stance.” However, given that Japan’s inflation rate is only slightly above zero, Bank of Japan Governor Haruhiko Kuroda may emphasize the need to maintain monetary stimulus, which is in stark contrast to the situation in other economies.

This will continue to put downward pressure on the yen, which fell to a nearly four-year low against the dollar last week, as the market expects the Federal Reserve (fed) to announce reductions in stimulus measures next week. The Bank of Japan usually issues policy statements and forecasts around noon, followed by Kuroda's press conference at 3:30 in the afternoon.

Five points of concern for the Bank of Japan's interest rate decision

Inflation
Due to changes in the consumer price basket, the Bank of Japan is expected to lower its current inflation expectations. At the same time, the focus will shift to how the bank views the impact of rising global commodity costs on prices next year. The forecast for the 2022 fiscal year, which is already higher than the market consensus, may rise again, and the Bank of Japan may also abandon its view that prices face downside risks.

Yen
Traders will also pay attention to Kuroda's comments on the yen. Last week, the U.S. dollar against the yen rose to a nearly four-year high. The governor of the Bank of Japan once said that it would be harmful for the dollar to be higher than the yen. However, the Japanese economy has changed since then. Some analysts Already expressed concern about the weak yen

Consumption
Since the last meeting of the Bank of Japan, commodity prices have risen sharply, and gasoline prices at gas stations have recently hit a seven-year high. Investors will pay attention to Kuroda's views on how this will harm consumers. As supply chain issues are dragging down exports and production, consumer spending is a necessary condition to support economic recovery.

Epidemic
Japan lifted the emergency lockdown on the new crown epidemic this month, and the number of new crown cases has dropped sharply. The market is watching whether the Bank of Japan will end the COVID-19 funding project in March as planned, or extend the project for the fourth time.

Election
Shortly after the central bank meeting, Japanese Prime Minister Fumio Kishida (Fumio Kishida) will face the first national election. Polls show that in Sunday’s election, the majority of the ruling party is at risk, although its ruling coalition may remain in control right. If performance is poor, Fumio Kishida may face pressure to increase the size of his promised spending plan, but analysts believe he will not force the Bank of Japan to change course.