Investing.com – The Bank of Japan meets next week, and Citigroup expects the central bank to leave policies unchanged given external uncertainties.
“We share the widely held view that policy will be left unchanged at the October 30-31 MPM [monetary policy meeting]. Current consensus is a rate hike in either December or January (we envision December) but we do not expect the BoJ to signal for it vigorously in October given uncertainty around the approaching US election and payroll data,” said analysts at Citigroup, in a note dated Oct. 25.
That said, the US bank sees the possibility that policymakers send a hawkish message that they would respond nimbly to any increase in upside risk to inflation, depending on forex levels when the meeting is held.
“The BoJ will likely emphasize the continued trend of rate hikes while pointing to external uncertainty,” Citi added.
Given renewed weakness in the yen recently, the BOJ may look to lay the groundwork for an additional rate hike to 0.5% at its December or January meeting.
There may not be much of a direct reaction for the USD/JPY, but given that the Fed is expected to cut rates further the contraction in the interest rate spread could one again start to put downward pressure on the pair over time.
The USD/JPY could temporarily go higher depending upon the result of the US Presidential election.
From mid-November uncertainty about the political situation in Japan and the US and the Fed’s monetary policy are likely to recede, and the BoJ may start leveling the ground for the next rate hike.
However, there is a risk that pressure to expand the fiscal measures will increase as the LDP loses seats and the implementation could be postponed.