(Bloomberg) -- Citing a need for sustainability, the Bank of Japan last September shifted its monetary policy framework to yield curve control. A year later the BOJ remains on cruise control -- and virtually no one expects that to change anytime soon.
Yet investors will be seeking clues to how the central bank might react to a range of risks and shifting global winds as it ends a two-day policy meeting on Thursday.
All 45 economists surveyed by Bloomberg this month said they expect the BOJ to leave policy unchanged, and nearly all of them said they don't see any change before Governor Haruhiko Kuroda's current term expires in April next year.
“Japan's recovery is likely to continue and that will let the bank again make the case that inflationary pressures are rising,” said Nobuyasu Atago, chief economist at Okasan Securities and a former head of the central bank's price statistics division.
The BOJ typically releases its policy statement in the early afternoon in Tokyo, followed by a press briefing by Kuroda at 3:30 p.m.
Fed Shadow
The BOJ's status as a laggard among global central banks is likely to be reinforced just hours before its meeting, when the U.S. Federal Reserve will hold a meeting of its own in which it is widely expected to decide to further normalize policy by unwinding its enormous balance sheet. This could add upward pressure on U.S. and Japanese yields, possibly making the BOJ's job of maintaining its yield target more difficult.
Some BOJ watchers also see a small risk of the yen strengthening if the Fed takes an unexpectedly cautious stance on its balance sheet. If that happens, Kuroda may stress the importance of continuing Japan's record easing, emphasizing the clear policy divergence with the BOJ's U.S. counterpart.
New Blood
Former banker Hitoshi Suzuki and economist Goushi Kataoka, an advocate of reflationist policies, will participate in their first policy meeting as new members of the BOJ board, which is now completely occupied by people chosen by Prime Minister Shinzo Abe. Suzuki and Kataoka replaced two staunch dissenters against the current policy regime, raising the prospect that Kuroda will achieve his first unanimous vote since September 2014.
That is the expectation of analysts at SMBC Nikko Securities and Daiwa Securities, among others. This would reinforce the view among market participants that Kuroda has a free hand to continue current policies as he sees fit. Yet Goldman Sachs economists note that Suzuki, formerly a private-sector banker, could play a role in any future discussions of the path to normalizing policy, given its likely impact on markets.
"The key issues will be how Fed policy feeds into the BOJ's calculus -- and how the two new board members help shape the policy debate," Bloomberg Intelligence economist Yuki Masujima said in a preview of the policy meeting.
Policy Anniversary
The BOJ has largely succeeded in keeping the yield on 10-year Japanese government bonds at its target of around zero percent since introducing its yield curve control program a year ago. That move shifted its policy objective to interest rates from quantitative easing.
Still, the central bank is far from free of concerns. Internal Affairs Minister Seiko Noda late last month became the latest Japanese official to call on the central bank to publicly outline a plan to exit its easing program, expressing a "vague sense of apprehension" about its ability to unwind its stimulus without market turmoil.
The BOJ has become the dominant player in Japan's bond market, accumulating about 40 percent of outstanding JGBs. With inflation still rising only slowly, and expected to peak well below the BOJ's target, the central bank's balance sheet is on track to exceed the size of a $4.8 trillion economy.
Kuroda has repeatedly said there is no significant problem with the overall program and the bank will continue to monitor its impact on financial markets and the economy. Analysts will be watching closely for any shift in his language or tone.
External Risks
Risk aversion in response to elevated tensions over North Korea's nuclear program test sent the yen to a 10-month high on Sept. 8 before reversing. The 10-year bond yield dipped below zero percent for the first time since November last year and is now back in positive territory.
This allowed the BOJ to buy fewer government bonds to maintain its yield target. Yoshimasa Maruyama of SMBC Nikko said he expects the pace of increase in bond holdings will slow down to 60 trillion yen ($538 billion) this year, highlighting a deviation from a BOJ's guideline of around 80 trillion yen annually.
Kuroda is likely to face questions about any further reduction in bond purchases and how the central bank would respond to any geopolitical crisis.
To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net.
To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Henry Hoenig
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