Let’s start off with what we already know.
According to our spankin’ awesome forex calendar, the BOJ will announce its rate decision at 12:00 am GMT on Tuesday, January 22, 2013. Last December, the central bank didn’t make any changes to its interest rates but it did increase its asset purchases by 10 trillion JPY, upping the bank’s monthly total purchases to 76 trillion JPY.
Japanese central bankers also announced that they would implement their Stimulating Bank Lending Facility this year. The program, similar to the BOE’s Funding for Lending Scheme, is aimed to boost the economy by providing banks with unlimited access to medium-term debt at very low interest rates.
Last but certainly not least, the BOJ promised that it would study the potential effects of setting inflation targets. It is for this particular reason that everyone is excited for the upcoming rate statement.
If you remember, new Japanese Prime Minister Shinzo Abe has always been very vocal against a strong yen. Since he was elected into office, the government’s head honcho has pressured the central bank to adopt bolder measures to fight deflation. In fact, the idea of doubling the BOJ’s inflation target to 2.0% was his idea. Heck, he even threatened to pass a law that would diminish the central bank’s independence in setting monetary policy if his request isn’t carried out!
Everyone is now looking to see if the BOJ would listen to Prime Minister Abe. No one expects any change in interest rates nor asset purchases. However, market participants are anticipating both the BOJ and the government to make a joint statement that they would work together in pulling Japan out of deflation.
Let’s get to the juicy part. How will this help you? I have come up with three scenarios.
First, the yen could get sold off on either of the following reasons. One, if the BOJ gives in to Abe’s request, more asset purchases would be likely made in the coming months to meet the inflation target. However, if BOJ Governor Shirakawa decides to stand his ground, the prospect of a very dovish Abe having a say over monetary policy could be enough reason for traders to sell the yen too.
Second, the yen could rally. As I have discussed, expectations for further easing from the central bank are pretty high. It’s possible that the BOJ could fall short of expectations and market participants may find the rate statement less-dovish than expected. Remember that Japanese Economic Minister Akari Amari already made a statement last week that the yen’s excessive weakness could actually hurt some consumers and a few industries who import their raw materials.
Third, we could see a classic buy the rumor, sell the news reaction. It’s not like the prospect of the BOJ easing monetary policy even further is something new. If the central bank’s decision comes in just as expected, the market’s knee-jerk reaction could be to sell the yen but the currency easily pare its losses.