The BOJ is not expected to change its policy when it meets on Friday. But the recent comments from the Governor, Kazuo Ueda, have shaken up the market a bit. That has led to increased speculation over the meeting. Additionally, the post-rate decision presser could be really interesting as members of the media press for certain clarifications.

It’s a particularly fraught time for the head of the BOJ, with the currency weakening to levels not seen since last year when the government was forced to step in to stop the slide of the yen. The market is extra alert for any comments that could be seen as trying to strengthen the yen. So far, the government and BOJ has maintained a fairly consistent theme about watching while insisting that easing will continue.

Sparking a controversy and expectations

A week and a half ago, Governor Ueda suggested in a press interview that some of the conditions needed to move away from easing might be met by the end of the year. That’s substantially sooner than prior forecasts from the BOJ and Ueda himself, who had previously suggested the end of the first quarter of next year.

The yen immediately appreciated substantially, and several government officials had to come out in the subsequent days to clarify that the ultra easing policy is still in place. That returned the yen to its prior trajectory, but planted the seeds of doubt as to whether the BOJ was actually going to stay easing for as long as the market is currently pricing in.

What could happen at the meeting

Since no actual policy changes are expected, the focus will be on the messaging. Investors will be looking for any clear signs of a “pivot” in the outlook, which would start setting the stage for the BOJ to move away from ultra-easing. So far, the rhetoric has been around keeping easing until inflation reaches the long-term 2% target. Which is a bit ironic, considering that inflation is above target at the moment.

Which brings up a potential wrinkle for the proceedings: The government will release the latest inflation data while the BOJ is sitting down in the middle of the meeting. Japanese CPI comes out three-and-a-half hours before the interest rate decision is made public. The markets aren’t expecting a major change in inflation, but if there is a surprise here, it could shake up the market ahead of the BOJ meeting. There will be little time for analysts to publish their thoughts on the reading in order to provide guidance to traders.

Potential outcomes

Japan’s headline inflation rate is expected to tick down to 3.0% from 3.3% prior. It would take a substantial move beyond forecasts to spark any expectation of a change in policy at the BOJ. Core inflation is also expected to come down a bit to 3.0% from 3.1% prior.

A hawkish interpretation of the BOJ would likely rely on Ueda or the statement essentially affirming the gist of the interview published a week and a half ago. This could cause a similar reaction in the yen, and support further strengthening. A dovish interpretation would likely be a full-throated rejection of the market interpretation of the interview, and lead to further weakness in the yen. The ambiguous result would be to try to affirm but couch the article in standard easing rhetoric which could leave the yen adrift for another month.

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