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Focus on central banks: BoJ with major change in 2023

We might see some changes in Japan's monetary policy this year, likely strengthening the JPY against the USD.

Investors anticipate radical changes in the Bank of Japan’s (BoJ) monetary policy as the central bank will get a new leader. Inflation developments might start favoring a rate hike in the country, which has not seen one in two decades.

New BoJ leader comes in April

Market investors are becoming intensely engaged in whether the Bank of Japan would bring further shocks this year after a recent move that very well took everyone unprepared.

The BoJ Gov. Haruhiko Kuroda’s ten-year term is scheduled to end in April, setting the stage for much conjecture over the following months because the central bank’s policy position may change depending on his replacement.

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As potential successors, names like current deputy governor Masayoshi Amamiya and previous deputy governor Hiroshi Nakaso have been discussed in the media.

Possible rate hike?

According to three individuals familiar with the Bank of Japan’s thinking, the bank is placing more importance on an inflation gauge that excludes fuel prices. It will likely increase its expectations for the index’s rise in its quarterly forecasts due this month.

The improvement would highlight the central bank’s growing belief that strong domestic demand will enable businesses to boost prices and maintain inflation sustainably around its 2% goal in the coming years.

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However, the sources added that the higher adjustment alone was unlikely to result in a rapid interest rate increase since many BoJ officials felt the need to carefully examine annual spring salary negotiations and the effects of US interest rate rises.

Following a two-day policy meeting that finishes on January 18th, the Bank of Japan will release its quarterly estimates for inflation and economic growth.

Because the BoJ must continue to support the economy until the current cost-push inflation changes into a demand-driven one supported by rising wages, Kuroda has ruled out the possibility of a near-term interest rate rise.

However, after the BoJ shocked markets in December by broadening the band around its 10-year bond yield goal, a move investors perceived as a precursor to a future rate rise, Japan’s long-term interest rates have slowly increased.

The interest rate differential between the United States and Japan will likely cease expanding this year as the rate increases in the United States end. As a result, economists anticipate that the dollar will progressively weaken rather than continue the robust trend witnessed in 2022. Saisuke Sakai, a senior economist at Mizuho Research and Technologies, stated the following. 

“If the BoJ makes more tweaks, including to its yield curve control, the yen’s rate might rally to the ¥110 or ¥100 marks.”

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