Ahead of the Bank of Japan's (BOJ) policy review meeting on Thursday, analysts are busy predicting what further stimulus it could announce and how that could affect the Japanese yen.
"We believe that the BoJ will ease further on Thursday, an event to which we attach a probability of about 65 percent. We expect a powerful package of 20 trillion yen increased quantitative easing purchases and a cut in the interest on excess reserve rate of 20 basis points to -0.30 percent. The BoJ is also likely to apply a negative rate on its lending facility." UBS said in a preview statement.
Last week, the yen weakened sharply after the BoJ announced it is considering cutting rates at which the central bank lends money to banks. On Tuesday, BoJ Governor Haruhiko Kuroda warned that bank profits could be affected if rates remain low for a long time.
The UBS research predicts a strong move upward in USD/JPY if the announcement is made in line with their expectations. "This would serve to underline our year-end forecast of 122 (for dollar-yen), something which might be under threat with a less-active BoJ." The currency cross was trading at 110.96 on Tuesday morning.
Earlier this year, the BoJ cut its headline interest rate to minus 0.1 percent. In addition to that, the BoJ's massive 80 trillion Japanese yen worth of quantitative easing targeted the country's real-estate investment trusts, exchange-traded funds and corporate bonds. But analysts believe these may not be enough for the BoJ to tackle falling inflation and weak economic growth.
"We expect significant further action from the Bank of Japan. Given the market's bad reaction to negative interest rates, it is likely they will use an expansion of their asset purchases and also negative rates on loans to the banks as the vehicle for more accommodation," David Stubbs, global market strategist at JP Morgan Asset Management told CNBC via email.