Markets in Limbo: Anticipation Surrounds BOJ’s Policy Meeting with ‘Will They or Won’t They’ Speculation

Wayne Cole’s assessment of the day ahead in European and global markets reflects a cautious start in Asia this week. The Nikkei led losses amid anticipation surrounding the Bank of Japan’s (BOJ) policy meeting scheduled for Monday and Tuesday.

The atmosphere was subdued, compounded by reports of North Korea’s launch of a suspected long-range ballistic missile on Monday. Despite this, South Korean shares experienced only a marginal dip.

Market analysts surveyed by Reuters expressed skepticism about an immediate shift in the BOJ’s ultra-loose monetary policy this week. However, a minority, approximately one-fifth, believed a change could occur in January, while the majority anticipated negative rates to conclude in April.

Conflicting reports have emerged regarding the seriousness with which the bank contemplates policy adjustments. There’s a possibility that policymakers will deliberate on the timing and conditions for policy tightening. Given the BOJ’s history of surprising the markets with sudden policy shifts, the implied volatility for the dollar/yen surged, signifying the perceived risk.

Market sentiment leans towards the eventuality of the BOJ abandoning negative rates, potentially positioning it as one of the few major central banks to tighten policy next year. While certain Federal Reserve officials have attempted to manage expectations around easing, market futures indicate a 74% probability of the first easing happening as early as March, with nearly two cuts priced in for May.

The projected scenario anticipates approximately 140 basis points of easing by 2024. This forecast partly hinges on the assumption that the Fed may need to ease to prevent real rates from climbing as inflation moderates.

This outlook underscores the significance of the upcoming release of the Fed’s preferred inflation metric scheduled for Friday. Analysts foresee a bias towards a softer figure. If the core PCE increases by just 0.1%, the six-month annualized inflation rate would decelerate to 2.1%, closely aligning with the Fed’s 2% target.

The stakes are high, emphasizing the delicate balance in the market, particularly regarding inflation and monetary policy, as investors await crucial indicators and remain watchful of potential shifts in central bank strategies.