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March 17, 2021

Event Preview: BOJ’s Policy Review

 Rounding up this week’s parade of central bank’s events is the Bank of Japan (BOJ) publishing its monetary policy decision for March.


But wait, there’s more! Governor Kuroda and his gang will also present the findings of their latest policy review.


Here are points to remember if you’re planning on trading the event on Friday’s Asian session trading.


What happened last time?

  • BOJ kept policies unchanged as expected in January
  • BOJ upgraded growth estimates for 2021
  • Kuroda still thinks it’s “too early to exit” from easy monetary programs

As widely expected, the BOJ kept its interest rates and yield curve control targets unchanged in January.


The central bank also raised its growth forecasts from 3.6% to 3.9% but emphasized that COVID-19 restrictions still present enough downside risks for Kuroda and his gang to think about tapering their easy policies.


Overall dollar weakness dragged USD/JPY and the rest of the yen crosses during the early Asian session, but the yen eventually gave up some of its gains before the session ended.


What are traders expecting this time?

  • No changes to interest rates or bond purchases
  • Policy review to reflect a more flexible way of dealing with stock market fluctuations
  • Wider bond yield band allowance?

Markets aren’t expecting the BOJ to make changes to its interest rates or bond purchases, but they do expect the central bank to present the findings of their monetary policy review.


That’s right, the BOJ is auditing itself!



If you recall, members are under pressure to keep their long-term spending “stably low” after years of bond and ETF-buying have ballooned BOJ’s balance sheet to 135% of GDP and has made the central bank the biggest holder of Japanese stocks. No wonder traders are talking bubbles!


So, which policies will the BOJ modify? Here are some of the loudest market speculations:


ETF buying

Buying exchange-traded funds (ETF) had an annual target of 450 billion JPY when it was launched in 2010.


Today the program buys an annual 6 trillion JPY worth of ETFs and has a cap of 12 trillion JPY. Talk about commitment!


The Japanese stock market isn’t exactly hurting these days, so traders expect the BOJ to scrap a numerical target and just intervene as needed. This would lessen the central bank’s (unnecessary) exposure to stock market fluctuations and limit the BOJ’s interference with regular market functions.


Yield curve control

The central bank is targeting a 0.0% yield for its 10-year bonds but allows rates to move by 40 basis points in either direction before it steps in.


Some believe that the BOJ will widen the band to 60 basis points. The move would come too close to a tapering, though, so others think that the BOJ will share a more flexible schedule for its bond purchases instead and then revisit the idea of widening the band some other time.


Negative interest rates

To prevent all these adjustments from signaling that the BOJ is ready to scale back its easy policies, Kuroda will likely hint at deeper negative interest rates if needed.


The policy is unpopular and is unlikely as an option, but it could encourage enough bulls to buy higher-yielding bets.