Yen shock? Currency in focus as BOJ readies more stimulus
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.
The markets are cautiously awaiting the results from the BoJ as well as the U.S. Federal Reserve which starts its two-day meeting on Tuesday. While the BoJ is expected to move the markets with a policy announcement, the Fed is expected to make no changes this month.
"(It's) almost certain that there will not be a change in interest rates at this (Fed) meeting. The language they use will be very important. Look for the word 'balanced' to signal that a June rate hike is still on the table," Stubbs said.
Amidst all the central bank meetings this week, economic growth across the globe, especially emerging economies, continues to concern some economists. According to Shang-Jin Wei, chief economist of the Asian Development Bank (ADB), growth in Asia is projected at 5.7 percent in both 2016 and 2017, down from 5.9 percent in 2015. The growth figures point to headwinds and moderate growth in China.
Another key risk, according to the ADB is producer price deflation, an index that measures the average change in selling prices received by domestic producers of goods and services over time.
"PPI deflation is a relatively recent phenomenon in how wide it is spread across countries," he told CNBC, adding that, "normally, we don't pay attention to it because PPI and Consumer Price Index (CPI) go together but now while many countries have moderate CPI inflation, they tend to have PPI deflation."
PPI deflation is quite big in Asia with pressures impacting major economies across the continent. "It is common even among advanced countries in the EU. Euro zone for instance has PPI deflation but China, India and other countries in Asia have very serious PPI deflation problem," Wei said.