All eyes are on the Bank of Japan next week and whether it finally ends the era of negative rates at its March 18-19 meeting.
By any sense of logic, the BoJ would have acted pre-emptively exited a long time ago by raising rates. But, this the BoJ and it plays by its own rules which is to err on the side of caution.
One reason may be that unlike other central banks which hiked rates aggressively in an effort to contain inflation, the BoJ has been looking to do the opposite. The BoJ has been looking for evidence that inflation is rising to a sustainable level.
Note, that the era of negative interest rates started in 2016. The last time the BoJ raised interest rates was in 2007, which makes this a major step for the BoJ.
What are the polls saying?
A Reuters poll of economists conducted March 11-15 indicated the following:
61.8% (21 out of 34 polled) expected an April rate hike
35% (12 out of 34 polled) looked for a rate hike in March
2.9% (1 respondent) No data given
While still in the minority the poll showed a sharp increase in calls for a March rate increase vs only 7% indicating such in the February poll.
80% (24 out of 30) expected the BoJ to end YOC (yield curve control) in either March or April. YOC is a BoJ policy of guiding the 10-year bond yield between 0% and a so-called loose top at 1%. Presumably it would be replaced with a more flexible policy.
What does this mean for trading?
The price action today (see chart) suggests some are either hedging against a buy the rumor, sell the fact reaction n or no rate hike at the March meeting. No change in rates would be a mid disappointment to some but in any case, it is just a matter of timing, whether March or April for the BoJ to make a long-awaited hike in rates. The surprise would be if the BoJ sounds hawkish rather than cautious when, not if it decides to raise rates.
In any case, expect the BoJ to be lurking (under the guise of warning against disorderly markets) if there are any outsized moves in the forex market. See Is a BoJ rate hike discounted? How Will USDJPY React https://global-view.com/is-a-boj-rate-hike-discounted-how-will-usdjpy-react/) for key levels to watch posy-BoJ,
Whatever the reaction, once the dust settles, the focus should quickly shift to the FOMC meeting on Wednesday.
Jay Meisler, co-founder, global-view.com
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