Marketmind: After the hawks, here comes the Bank of Japan dove

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.

The Bank of Japan, the most dovish major central bank in the world, announces its latest policy decision on Friday, with markets highly sensitive to signs of when and to what degree it will ditch its super-loose policy.

Asian markets should go into the decision on the front foot, after the and Nasdaq closed at 14-month highs on Thursday as investors bet that U.S. interest rates are close to peaking.

The BOJ follows surprisingly aggressive interest rate increases and guidance recently from policymakers in Canada and Australia, and this week’s hawkish signals from the European Central Bank and, to a lesser extent, the U.S. Federal Reserve.

The BOJ remains the outlier among major central banks, promising to maintain its loose policy until it is sure inflation meets the 2% target. Polls, sources and market moves all suggest no move on rates or the yield curve control (YCC) scheme, leaving the focus on BOJ Governor Kazuo Ueda’s press conference.

While the Fed and others have tightened policy by 500 basis points or raised rates to their highest in decades, Japanese interest rates are still negative and the central bank is buying unlimited amounts of bonds to cap yields at a certain level.

Around half of the economists in a Reuters poll expect a rollback of easing, including a tweak to YCC, in either July or September. Ueda could open the door to this on Friday, nodding to inflation currently overshooting BOJ forecasts and a potential upgrade to BOJ price projections in July, they said.

But Ueda has stressed the need to maintain ultra-loose policy until durable wage growth accompanies rising prices. Changes to YCC may come as soon as July, but an interest rate hike is a long way off – Bank of America (NYSE:) analysts think rates will stay on hold until summer 2024.

If Japanese assets are any indication, investors expect Ueda and his colleagues to err on the dovish side.

The yen on Thursday slid to a new low for the year through 141.00 per dollar and, most remarkably after the ECB made it clear it will raise rates further, to a 15-year low against the euro of 153.68 per euro.

Japanese authorities will be watching these developments closely and intervention to stop the rot cannot be ruled out. Perhaps 145.00 per dollar would be the trigger.

The cheapness of Japan’s currency has made its stock markets extremely attractive to foreign investors. The benchmark rose to fresh 33-year high of 33,767 points on Thursday before closing marginally lower.

Here are key developments that could provide more direction to markets on Friday:

– Japan monetary policy decision

– Euro zone inflation (May, final reading)

– Fed’s Bullard, Waller and Barkin all speak

(By Jamie McGeever)

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