Market Implications and Potential Shocks Explored

In anticipation of the upcoming Bank of Japan (BOJ) policy decision, experts are debating the potential implications on global markets. With a consensus for no policy change, many analysts are turning their attention to the possibility of a policy shock and potential announcement of a policy review. Weston McMore of Blockworks Macro argues that any attempts to normalize policy by the BOJ would result in some form of Japanese Government Bond (JGB) purchasing. However, he maintains that the BOJ’s primary focus is on achieving price stability rather than supporting fiscal financing.

Despite concerns about unsustainable debt levels in Japan and the BOJ’s role in artificially pinning yields down, McMore believes that the bank is not here to fund the government’s fiscal spending. He acknowledges that there are calls to end yield curve control, but he dismisses these arguments as arbitrary. The BOJ has always been a leader in radical policy experimentation, and McMore points out that factors such as inflation, global policy alignment, and the sustainability of current yield curve control policies are not likely to influence the BOJ’s decision-making.

Market functionality and the shape of the JGB yield curve will be crucial, as they were when the BOJ’s actions in January 2023 caused speculation about the possibility of a policy shock at the upcoming meeting. Although McMore anticipates no policy change due to the restored shape of the yield curve, he does not rule out the possibility of a shock enacted on the BOJ’s own terms. With Deputy Governor Uchida, an experienced policy designer, now the most influential figure in Japan’s monetary policy, there is potential for surprise.

However, McMore leans towards no actual policy change, citing uncertainty about Governor Ueda’s intentions and the need for caution when assessing market reactions following the policy statement and press conference. The upcoming FOMC meeting could also impact market reactions, with the full response not likely to be seen until after Fed Chair Powell’s press conference.

While the BOJ policy decision may not result in any immediate changes, the potential for a policy shock and the influence of key players like Deputy Governor Uchida make it an event to watch closely. Investors and analysts alike should be prepared for potential surprises and monitor the situation closely in the coming days.

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