BOJ Preview: Three Scenarios and Implications for USD/JPY – TDS

The Bank of Japan (BOJ) Interest Rate Decision and its impact on the USD/JPY pair are deliberated by economists at TD Securities.

Hawkish (10%): Total Elimination of YCC

The BoJ cancels the YCC and sets the end of the NIRP as the price and wage increase cycle begins. The bank will likely change its fiscal year 2024 core inflation forecast, but more importantly, its fiscal year 2025 core inflation forecast may indicate a forecast of 2% (previously: 1.6%) to reflect Japan's path out of past deflation. USD/JPY -2.5%.

Base Case (55%): Raising the Ceiling to 1.5%

The BoJ widened the upper limit of the reference range for 10-year JGBs from 1% to 1.5% and potentially raised the fixed-rate purchasing operation. Banks may signal that these changes are a precautionary measure given the risks of rising wages and prices. Implicitly behind these changes, the BoJ may realize that its fight to curb rising yields remains difficult due to moves abroad, and real interest rates may become too accommodative as a result of shifting inflation expectations higher. Ueda may take this opportunity to end YCC in December and end NIRP in January 2024. USD/JPY-1%.

Dovish (35%): No Change to YCC Settings

BOJ kept YCC settings unchanged and reiterated that there is still some distance before the 2% price target is visible. The bank may maintain its FY24 and FY25 core inflation forecast at <2% to send a message that current inflationary pressures are temporary and unlikely to last. USD/JPY +0.5%.