Markets remain wary of the Bank of Japan's capacity to surprise ahead of Tuesday's monetary policy decision

BoJ governor Haruhiko Kuroda with finance minister Taro Aso. Photo: Kazuhiro Nogi/AFP/Getty Images

Of all the major central banks, few have a reputation of surprising markets more than the Bank of Japan (BoJ), particularly in recent years.

On numerous occasions since 2013 it has delivered surprise monetary policy announcements — both overwhelming and underwhelming market expectations — which have caused short-term market gyrations that are often large in scale.

And now the BoJ is about to deliver its first monetary policy decision of 2017, with markets once again adopting the view that the bank is unlikely to alter monetary policy, even amidst signs of a pickup in both the Japanese and global economies.

Despite its reputation for surprise, almost no one thinks the BoJ will do much, aside from potentially lift its assessment for the Japanese economy in the period ahead.

A continuation of its monetary policy easing program – known as ‘quantitative and qualitative monetary easing (QQE) with yield curve control’, which uses government bond purchases to anchor 10-year Japanese government bond yields at around zero – is seen as a lock by markets, with many adopting the view that the bank will wait to see how the global economy fares under new US president Donald Trump.

It creates the ideal scenario for the BoJ to surprise yet again, should it willingly choose to or not.

Ahead of Tuesday’s policy announcement, it’s probably an opportune time to look at some of the analyst commentary that has hit out inbox ahead of the event.

Here’s just a few of the views that have been shared, starting with Richard Grace, chief currency and rate strategist at the Commonwealth Bank:

Richard Grace, CBA

The Bank of Japan is unlikely to change policy at this week’s meeting despite a recent modest pick-up in Japan’s inflation. News last week that the BOJ have purchased ¥450 billion of JGBs in the most recent period compared to ¥410 billion in the previous period (equal to a 10% increase) simply reflects the fact that the BOJ is acting as it said it would in its last policy commitment, and that is to keep the ten-year JGB at or close to 0.0%, as opposed to its current rate of 0.084%.

It does not reflect the risk that the BOJ will further ease monetary policy at this week’s meeting.

Koichi Sugisaki, Morgan Stanley

Our economists expect the BoJ to hike its real GDP growth projections in its January 31 Outlook Report update while leaving the “yield curve control” (YCC) framework and asset purchase program essentially unchanged.

A near-term shift in policy looks highly unlikely, given that Japan CPI ex fresh food (core CPI) remains in negative territory.

Tetsufumi Yamakawa, Yuichiro Nagai, Yukito Funakubo, Barclays

We expect the BoJ to keep its current QQE+YCC policy intact by a majority vote at the 30-31 January monetary policy meeting. In the quarterly outlook report, to be released at the same time, we expect upward revisions to the FY17-18 real GDP growth forecasts, but only small, if any, adjustments to projections for core CPI inflation.

We retain our outlook for the BoJ to allow quantitative easing (QE) to taper in line with JGB supply and demand in FY17, while raising its target for yields under the yield curve control (YCC) program in Q3. However, the suitability of rate hikes will depend heavily not only on the trend in (expected) inflation, but also financial conditions (share prices and exchange rates) as well as the permeation of rate hike expectations in the market (dialogue with the market).

Anette Beacher, TD Securities

The BoJ should be side-lined on all fronts but resolute in its yield curve control framework. Speculative ‘taper talk’ is premature though we think this will need to be reassessed in the coming months. Now is not the time to shift or capitulate on policy. Instead, it is more likely that the BoJ could double down. Any sign that the BoJ flinches for policy reasons will introduce significant pullback risks in USD/JPY.

Chris Weston, IG Markets

We could see some tweaks to the BoJ’s economic outlook, but by and large this is not the time to be altering the run-rate of ETF buying or its yield targeting stance.

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