BoJ preview: Policy changes unlikely, yen seen higher

The Bank of Japan was likely to refrain from announcing any changes to the settings for its main policy levers on Thursday at its next meeting given the risk that inflation would remain far from its target, analysts at Bank of America-Merrill Lynch said.

Furthermore, policymakers in Tokyo are probably wary of inciting any unwanted strength in the country's currency, the yen, which may result from policy changes at this stage.

To take note of, BoA-ML expects the trend towards a weaker yen to reassert itself over the medium-term.

Nonetheless, at their 27 April policy meeting, Japanese rate-setters will likely revise their growth forecast for the country while at the same time lowering that for 'core' inflation.

Yet the changes are likely to be only modest and therefore will probably not impact on the BoJ's policy stance, the analysts said.

Indeed, BofA-ML recently raised its own projection for Japanese GDP growth in fiscal year 2017 from 1.4% to 1.6%.

The possibility does exist that it might remove its reference to maintaining its 80trn yen programme of bond purchases each year, although that too is unlikely to move the yen, BofA-Merrill explained.

In any case, it probably will not eliminate that numerical target, although in practice it has been slowing the pace of bond buying and it is expected to continue doing so.

"Looking ahead, we expect the BoJ to stay on hold until at least the end of Governor Kuroda's current term, and most likely FY18, given that growth in ex-energy core inflation measures is likely to remain far from target."

Indeed, inflation excluding food prices printed at 0.2% year-on-year in February, well below the 1.5% which the BoJ had penciled in for fiscal year 2017.

As a result, the BoJ may lower its CPI ex-food forecasts by between 0.2 and 0.3 percentage points, while keeping that for the next fiscal year at 1.7%, the investment bank added.

A military incident with North Korea was a risk factor, but the analysts said it might not lead to a stronger yen due to Japan's proximity to that country and the presence of a US military base on its soil.

On 24 April on the other hand, HSBC cut its year-end 2017 for US dollar/yen from 110.0 to 100.0.