MNI BOJ WATCH: BOJ Looks At Trimming JGB Buys, Rate On Hold

The Bank of Japan is likely keep its policy interest rate at a range of zero percent to +0.1% at its upcoming meeting, as it continues to monitor consumption with a view to a possible hike in coming months, though it could act this week to reduce its monthly government bond purchases from around JPY6 trillion.

The BOJ is concerned that some investors are staying away from longer-dated JGBs amid uncertainty over the outlook for its bond-buying. Any reduction in purchases will be accompanied by a pledge to stay in the market and to ensure there is no spike in long-end yields, which in effect could equate to yield-curve control. (See MNI POLICY: BOJ Mulls Cut In Bond Buys As Early As Next Week)

As they prepare their decision, officials will have to make challenging calculations regarding banks’ appetite for additional bond purchases and demand for excess reserves, as well as term premia. Policymakers will also examine the extent to which the weak yen increases upside risks to inflation as they assess chances of achieving their 2% target.

JULY MEETING

While the Bank is likely to keep its policy rate unchanged at its meeting this week, it could announce an increase as early as next month, if private consumption holds up and there are indications of plans for solid wage hikes at smaller companies, which would give it confidence of solid increases in October, when many firms revise their prices. (See MNI POLICY: Weak Yen Boosts Probability Of July BOJ Rate Hike)

While consumer sentiment worsened in May for a third straight month, officials consider that consumption is likely to continue to recover in the second quarter, supported by expectations for higher wages and a temporary cut to income tax cut coming into effect in June.