BOJ’s Kuroda Faces Balancing Act to Avoid Tanking Yen

(Bloomberg) — Bank of Japan Governor Haruhiko Kuroda faces another key test of his decade-long term Friday as he tries to stick with rock-bottom rates without triggering the same kind of yen slide that prompted currency market intervention after last month’s meeting.

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Kuroda and his fellow board members will maintain the world’s last remaining negative interest rate among major central banks at the end of a two-day meeting, according to all 49 economists surveyed by Bloomberg. The central bank will also keep its 0.25% cap on 10-year government debt and its asset purchases, they say.

With the European Central Bank expected to deliver an outsized rate hike on Thursday, followed by a similar Federal Reserve move next week, a stand-pat decision will further emphasize the BOJ’s outlier status. That may spark a renewed slide in the yen even though a hold outcome is widely expected.

The currency’s recent volatility will have BOJ watchers on high alert for any surprise, especially after an apparent escalation of government intervention in markets to counter rapid moves.

Prime Minister Fumio Kishida has indicated his support for a division of labor with the central bank. This involves the finance ministry curbing swings in the yen and offering support to mitigate rising prices, while the BOJ pursues stable inflation supported by wage gains to fuel further economic growth.

Kuroda ultimately cannot control how market players interpret his remarks, but he needs to strike a careful balance between emphasizing the need for continued easing and the risk of inviting a further weakening of the yen. Any careless words or actions by Kuroda could strain the consensus with the government.

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The BOJ will also publish quarterly economic projections. While its inflation forecasts are likely to be revised up for this fiscal year and next, they won’t indicate that sustainable 2% price growth is in sight, according to people familiar with the matter.

The bank is expected to release its policy statement and economic outlook report around noon followed by Kuroda’s press briefing at 3:30 p.m.

What Bloomberg Economics Says…

“The Bank of Japan will likely keep its main policy levers unchanged, yet again. Core inflation well above the 2% target and set to hit 3% isn’t enough to prompt the BOJ to reduce monetary easing. Stronger wage growth is desired first.”

— Yuki Masujima, economist

Click here to read the full report.

Here is what to look for:

• Any new wording on the yen in the policy statement and outlook report will be closely scrutinized. Credit Suisse economists see a chance of the BOJ scrapping its easing bias on policy as it tries to cool pressure on the currency.

• Kuroda is likely to emphasize that a rapid weakening of the yen is negative for the economy and that he will keep a close eye on its moves and impact.

• Since price growth is already at 3%, a higher inflation forecast for this fiscal year is largely a given. Analysts are paying closer attention to the upward revision for the following year to assess the sustainability of price gains.

• Economic growth projections will probably be cut as global policy tightening to tame inflation clouds the economic outlook. That’s a factor Kuroda can cite for continuing monetary easing.

• Fixed-income traders will look out for any new steps to improve the functioning of their market. Japan’s 10-year bond failed to trade for four straight days earlier this month, the longest streak since it became the benchmark in 1999.

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