Bank of America Merrill Lynch Global Research discusses its expectations for tonight's BoJ policy meeting.
"The BoJ will wrap up its two-day policy meeting on 31 October. Expectations for a rate cut have fluctuated since the last policy meeting. With the strong equity market and a weaker JPY, we think the expectation in the FX market for a rate cut has subsided. Moreover, the BoJ has kept its emphasis that an excessively flat yield curve is undesirable. A rate cut would likely exert flatting pressure without measures to counter it, such as a further reduction or even an outright sale of JGB purchases by the BoJ, which may go against the BoJ's commitment to expanding the monetary base until the inflation goal is achieved. A steep yield curve also reduces incentives for Japanese investors to buy foreign assets," BofAML notes.
"We think JPY would not react much to the BoJ's decision to stay on hold. A surprise rate cut would likely generate a 1-2% reaction in JPY, judging from the past episode, but we think such a reaction would be unsustainable as (1) it would likely be accompanied by measures to offset pressure on the yield curve, (2) USD/JPY has already corrected higher, and (3) there seems little JPY long position in the market," BofAML adds.