Credit Agricole see the potential for yen volatility surrounding the Bank of Japan today

I've posted some previews of the Bank of Japan today earlier:

• Economic calendar in Asia - Tuesday, 23 January 2024 - Bank of Japan policy statement due
• Bank of Japan to revise price outlook for fiscal 2025
• Bank of Japan preview - traders will focus on Governor Ueda's following press conference

This now from Credit Agricole via eFX

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Key Insights:

1. BoJ Policy Expectations:

   • The consensus and Credit Agricole's economists anticipate the BoJ will maintain its Yield Curve Control (YCC) and policy rate unchanged in the upcoming meeting.

2. Impact of Economic Outlook Review:

   • The BoJ's review of its economic outlook, especially in the context of the recent earthquake in North West Japan, could influence the JPY. A forecast of prolonged negative impacts on growth and inflation could dampen expectations for ending negative interest rate policy (NIRP) in 2024.

3. Potential JPY Volatility:

   • Market expectations for a cessation of NIRP and a rate hike by September 2024 mean that any deviation in the BoJ’s outlook could lead to volatility in the JPY.

4. Adjustments in Bank Reserves:

   • The BoJ might adjust the tiering of local banks’ reserves, reducing the amount subject to the -0.10% policy rate. Such a move could be initially perceived as a signal of an imminent end to NIRP (potentially boosting the JPY), but Credit Agricole interprets this as a negative for the JPY.

5. Extended Life of NIRP:

   • Adjusting reserve tiering could make NIRP more tolerable for Japanese banks, possibly extending its duration. This would likely be negative for the JPY but positive for bank stocks and the Nikkei index.

6. Correlation Between Nikkei and JPY:

   • A strong negative correlation exists between the Nikkei index and the JPY, suggesting that factors beneficial to the stock market could adversely impact the currency.

Conclusion:

Credit Agricole predicts potential JPY volatility around the BoJ’s upcoming meeting, driven by the central bank's economic outlook and policy adjustments. While changes in reserve tiering might initially suggest an end to NIRP, they could actually extend its duration, impacting the JPY negatively. The relationship between the Nikkei and the JPY remains a crucial factor to watch in this context.

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