ALL EYES ON KURODA AND YELLEN

By Ruma Dubey

It’s a big day tomorrow as far as Central Bank meetings are concerned. First the Bank of Japan – the country’s central bank will meet and the tentative timing is around 10-111 AM when the BoJ will announce its fiscal policy and announce a decision on its interest rate. This will be followed by a Press Conference at 12 noon.

And then midnight, at 11.30 PM to be more precise, the US Federal Reserve will announce its interest rate decision.

Thus with two important economies of the world expected to announce their fiscal decisions, markets across the globe are on a tenterhook – there is uncertainty and rightly so, at this juncture no one wants to stick their neck out.

But the big question doing the rounds on Dalal Street is – why has the BoJ meet become all so important? From when did we start paying so much attention to what BoJ does? We understand the US Fed Reserve but BoJ?

The BoJ governor Haruhiko Kuroda had made a pledge in 2013 that he will bring back inflation to 2%. This target is nowhere near close to being met at 0.4% and this has seriously dented the reputation of the Governor.

So now tomorrow, Kuroda has said he will be releasing a “comprehensive assessment” of its policies and has hinted that he will do whatever it takes to ease monetary policy and thus major stimulus, keeping interest rates further into the negative territory, quantitative and qualitative easing’ the market is expecting the works; an all-out kind of announcement, so much so that many expect the BoJ meet to upstage the US meet, which as such would be just a formality. Thus this feeling that “anything is possible” has out BoJ right into the limelight.

All eyes will be on whether or not Kuroda will give up on his 2% inflation target. There is also a lot of anticipation as to what BoJ will do about its interest rates. The BoJ Governor has already stated that benefits of negative interest rates outweigh the cost so the ears will be trained tomorrow to hear if there are more rates cuts, pushing the rates into further negative territory.

Then there is also the expectation of what BoJ could about its asset buying program. The QE is estimated to be in the rage of ¥70tn-¥90tn a year. There is also speculation that BoJ might shorten the average remaining maturity of Govt bonds from the current 7 to 12 years; shortening the years will raise the long term bond yields, helping banks offset the burden of the negative interest rates. This, the markets have already assumed is a certainty to happen – they call is “steepening the yield curve”.

Overall, the markets tomorrow are not expecting a rate cut from BoJ but will send out a signal about future cuts.

Naturally, the Indian markets will toe the line of the world markets and like today, we can only watch and get these two central bank’s meet over and done with.