MNI BoJ Preview - July 2024: Bond Buying Taper But Close Call On Rate Hike

EXECUTIVE SUMMARY

• The Bank of Japan's (BoJ) Policy Board will convene on July 30-31, with markets keenly observing any steps the central bank may take towards monetary policy normalisation. Governor Kazuo Ueda is expected to hold a press conference following the meeting on July 31.
• At this week’s meeting, the BoJ is anticipated to unveil a detailed plan for reducing the pace of its bond purchases over time. The upcoming plan is expected to outline the specifics of the reductions in terms of magnitude, duration, and flexibility. Market estimates suggest a gradual reduction, potentially cutting monthly purchases by half over two years. This announcement will mark a significant shift in Japanese monetary policy, as the BoJ has been consistently expanding its bond holdings since 2012.
• Regarding policy rate settings, we anticipate the BoJ will maintain its target for the overnight uncollateralized call rate at 0-0.1% this week, consistent with consensus. Those advocating for the BoJ to remain on hold cite an uneven economic expansion and only a modest acceleration in wages and prices.
• Contrastingly, a recent Reuters report suggested the BoJ might consider raising interest rates this week, consistent with market pricing. Proponents of a rate hike argue that a 10-15bp increase represents a minor reduction in policy accommodation rather than tightening.
• Even if the BoJ decides to maintain its policy rate, the Outlook Report and post-MPM press conference might raise the price outlook, sending a clear signal of a potential rate hike at the September MPM provided upcoming data aligned with BoJ expectations.
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