Ella 
The Bank of Japan is likely to maintain its bond yield control curve policy and interest rates unchanged.
Bank of Japan Governor Kazuo Ueda is unlikely to signal the timing of adjustments to monetary policy.
There is scope for USD/JPY to retest multi-year highs at 151.94.
The Bank of Japan (BoJ) will announce its monetary policy decision on Tuesday. As usual, the Bank of Japan is widely expected to keep interest rates on hold, with the main benchmark rate holding steady at -0.1%, even though Japan’s inflation rate has been above the central bank’s 2% target for nearly two years. Additionally, policymakers are likely to maintain the bond yield control curve policy (YCC), which currently allows 10-year Japanese government bond (JGB) yields to rise to around 1.0%.
The yen has been trading lower since March 2022, with USD/JPY surging to multi-year highs of 151.94 in October 2022. In November and December last year, the Bank of Japan “de facto” tightened monetary policy and increased its tolerance for long-term bond yields, and the yen recovered accordingly. At the time, speculators believed that Japanese authorities were in the early stages of abandoning ultra-loose monetary policy. However, as 2023 came to an end, USD/JPY resumed its gains as Bank of Japan Governor Kazuo Ueda gave no signals of policy adjustments. USD/JPY is trading around 148.00 ahead of the Bank of Japan decision.
Meanwhile, Japan’s core consumer price index (CPI) rose 2.3% in December 2023, slowing from 2.5% in November and hitting the lowest level since June 2022. This data further weakens the possibility of adjustments to current monetary policy, and considers that policymakers have not taken action when inflationary pressures are greater.
Another factor driving the central bank’s decision was wage growth. Wage growth is an important component of price pressures because wage growth often triggers inflation concerns. Indeed, lackluster wage growth partly explains Japan’s stagnant economy and its decision to adopt ultra-easy monetary policy back in 2016.
Japan has experienced its fastest wage growth in decades for much of 2023, fueling confidence that the Bank of Japan may adjust monetary policy. All in all, there is no reason for the Bank of Japan to adjust the path of monetary policy, especially since policymakers have said rising wages are a prerequisite for moving away from monetary stimulus.
