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Jun 07 - 12:55 AM

Credit Agricole: What We Expect from Next Week's June BoJ Meeting

By eFXdata  —  Jun 06 - 04:30 PM

Synopsis:

Credit Agricole outlines their expectations for the upcoming Bank of Japan (BoJ) meeting. While they anticipate the BoJ will maintain its current policy rate, they foresee a reduction in Japanese Government Bond (JGB) purchases. This move aims to support the Japanese yen (JPY) without directly altering the policy rate, addressing inflationary pressures driven by the weak currency.

Key Points:

  1. Policy Rate Expectation:

    • The BoJ is expected to leave its policy rate unchanged at the June meeting.
    • Maintaining the policy rate aligns with the BoJ's cautious approach to monetary policy adjustments.
  2. Reduction in JGB Purchases:

    • Anticipated reduction in JGB purchases from JPY6 trillion to JPY5 trillion per month.
    • The BoJ has already decreased its buying in the 5-10Y part of the curve from JPY475 billion to JPY425 billion.
    • This strategy helps to support the JPY without raising the policy rate, mitigating the currency's inflationary impact.
  3. Impact on JPY:

    • Previous research indicates that the JPY remains weak partly because the BoJ has not reduced its JGB purchases, keeping long-end JGB yields suppressed.
    • By reducing JGB purchases, the BoJ aims to alleviate some of the downward pressure on the JPY.
  4. Drivers of USD/JPY Exchange Rate:

    • Credit Agricole's FAST FX model identifies US-Japan short-term rates and long-end yield spreads as key drivers of the USD/JPY exchange rate.
    • Both short- and long-end JGB yields are significant factors influencing the currency's valuation.

Conclusion:

Credit Agricole expects the BoJ to take a measured approach at the upcoming June meeting by maintaining the policy rate and reducing JGB purchases. This move is intended to support the JPY and address inflationary pressures without resorting to rate hikes. The anticipated reduction in JGB purchases aligns with broader efforts to stabilize the currency and manage economic conditions effectively. Investors should watch for these developments, as changes in JGB purchasing patterns could have significant implications for the JPY and broader market dynamics.

Source:
Crédit Agricole Research/Market Commentary

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