The Bank of Japan is unlikely to change policy. Its current policy of targeting 10-year bond yields and expanding the balance sheet by JPY80 trillion is aimed at boosting core inflation to 2%.
However, the risk is that BOJ Governor Kuroda surprises the market as he has done on other occasions. If Kuroda is going to surprise the market, what would it take?
There are several moving parts. First, the BOJ currently forecasts core CPI, by which it means consumer prices excluding fresh food, will rise 1.5% this fiscal year. This is highly unlikely, erring on the side of hope over analysis. The core rate stood at 0.2% in February and is expected to have remained there in March, which will be reported before the weekend. It could bring it toward the market expectations.The Bloomberg survey puts it at 0.7% this year.Second, the BOJ could push out when it expects to achieve its target, which now looks to be the end of the next fiscal year–in two years’ time.
Both of these measures would likely signal an extension of the unorthodox policies. This leads to a third step the BOJ could take. Many in the market see that the BOJ unlikely by JPY80 trillion of government bonds this fiscal year. On the one hand, the shift toward targeting the 10-year yield has required fewer purchases that previously. The pace of BOJ bond buying has slowed. On the other hand, estimates suggest that as much around JPY40 trillion in government paper it owns will mature. It could announce a cut in its the overall JGB purchases.
Fourth, the BOJ could raise its growth forecast. Last week Kuroda acknowledged that the economy was stronger than anticipated a few months ago. Exports have been strong, and this has helped spur industrial production and capital expenditure. Household consumption remains in the doldrums.
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