After the Federal Reserve, the Bank of Japan is about to take the stage!

Overnight, the Federal Reserve cut interest rates by 50 basis points in a dovish move while hawkish expectations for rate cuts were tightened, shifting market focus to the Bank of Japan.

On Friday morning (September 20), the Bank of Japan announced its September interest rate decision, with Governor Haruhiko Kuroda holding a press conference at 14:30. At the end of July this year, the Bank of Japan unexpectedly raised interest rates, triggering a "yen carry trade unwinding" and causing unprecedented financial market turmoil. This time, how will the Bank of Japan act?

Bank of America Merrill Lynch, Morgan Stanley, Goldman Sachs, and other investment banks unanimously believe that the Bank of Japan will stand pat on Friday, maintaining the policy rate at 0.25%.

Despite stable economic and inflation data in Japan since July, the Bank of Japan aims to normalize monetary policy. However, institutions believe that the current yen trend, along with rising economic and political uncertainties, diminish the necessity for a rate hike in Japan in the short term.

Haruhiko Kuroda's speech may signal the next rate hike and assess current inflation and economic data. Goldman Sachs and Bank of America Merrill Lynch predict that the Bank of Japan's next rate hike will be in January next year.

Meanwhile, the painful memories of "Black Monday in August" are still fresh, and the market continues to closely monitor the US-Japan interest rate spread and the yen trend. The policy directions of the Federal Reserve and the Bank of Japan will undoubtedly impact the capital markets.

General Expectation: "Stand Pat" in September

For the Bank of Japan's monetary policy meeting on Friday, the market generally expects it to "stand pat," maintaining the policy guidance and policy rate at 0.25%.

Morgan Stanley expects the Bank of Japan to maintain its current monetary policy. The bank believes that the Bank of Japan is still in the stage of evaluating the impact of the unexpected rate hike in July, especially considering the lagged effects of price transmission and the upcoming political elections, there is no rush to hike rates again. Morgan Stanley stated:

As Vice Governor Masayoshi Amamiya mentioned on August 28, the Bank of Japan is currently evaluating the effects of the July rate hike and needs to carefully assess the impact of domestic and international market developments on the economic and price outlook. Despite wage increases, price transmission to the private sector is still lagging, coupled with the upcoming Liberal Democratic Party presidential election, there is no immediate need for the Bank of Japan to hike rates.

Morgan Stanley plans to focus on Bank of Japan Governor Haruhiko Kuroda's speech and his assessment of inflation and economic data since the July rate hike. The bank believes that Kuroda may give a positive assessment of domestic demand in Japan, especially personal consumption, as "progressing smoothly."

Goldman Sachs also expects the Bank of Japan to stand pat this time, and a Bloomberg survey of 53 analysts also unanimously believes that the Bank of Japan will maintain the current rate.

Meanwhile, Bank of America Merrill Lynch holds the same view, stating that the strengthening yen and rising economic and political uncertainties reduce the urgency for a rate hike in the short term. The bank stated:

The situation in the past month has further strengthened the motivation for the Bank of Japan to remain cautious, including: 1) Increased market volatility after the July meeting, requiring monitoring of its impact on the economy; 2) Strengthening of the Japanese yen; 3) Increased uncertainty in the U.S. economic outlook; 4) Increased political uncertainty: In addition to the U.S. presidential election on November 5th, the ruling party in Japan will elect a new leader on September 27th.

When to Raise Interest Rates: December this Year or January Next Year?

Goldman Sachs stated in a recent research report that after the Bank of Japan raised interest rates in July, economic data and inflation trends were basically as expected. Japan's GDP grew by 0.8% quarter-on-quarter in the second quarter, and wage increases have partially transmitted to service prices.

Although the Bank of Japan's "hawkish" stance stated that it will continue to raise interest rates if data meets expectations, Goldman Sachs believes that confirming a rebound in inflation takes time , and the "best" timing for the Bank of Japan to raise interest rates next is still January next year. The bank continues to view the October price revision period as a turning point for Japan's inflation trend, expecting inflation to gradually rise along with prices, making January next year the best time to judge whether inflation rebounds.

However, Goldman Sachs stated that market volatility could change this timeline. If the market remains stable and economic data improves, the Bank of Japan may raise interest rates in December. Bloomberg's survey also shows that 53% of analysts expect the Bank of Japan to raise interest rates in December. Their analysis suggests that the Bank of Japan's interest rate hike in July led to significant global market turmoil in early August, but this did not change the Bank of Japan's ongoing rate hike pace.

Bank of America Merrill Lynch predicts that the Bank of Japan may raise interest rates again to 0.5% in January 2025, and further raise them to 0.75% in the second half of next year. Whether the Bank of Japan can gradually advance policy normalization will depend on the outlook for the U.S. economy. The bank wrote:

If the U.S. economy experiences a soft landing and the Federal Reserve begins to gradually cut interest rates, this should not hinder the Bank of Japan from continuing to raise interest rates. However, if the U.S. labor market and economic activity data further deteriorate, it may raise concerns about a recession, prompting the Federal Reserve to accelerate rate cuts, which would reduce external demand, lead to further strengthening of the yen, and increase downside risks to inflation and wage growth in the 2025 fiscal year. In this scenario, the Bank of Japan is likely to pause interest rate hikes and maintain the policy rate at 0.25%.

How Will the Japanese Yen Move?

After the Federal Reserve cut interest rates by 50 basis points overnight, although the yen against the dollar rose by more than 1% at one point, the increase narrowed due to Powell's hawkish comments.

Bank of America Merrill Lynch believes that the Japanese yen is very sensitive to the news from the Bank of Japan, but this meeting is unlikely to have a significant impact on the yen. The bank expects the USD/JPY to rebound to 150 in the fourth quarter of 2024.

Considering that the Bank of Japan is still pushing for policy normalization, positive comments from Governor Haruhiko Kuroda at the press conference on future rate hikes may support the yen. However, we believe that the recent decline in the USD/JPY has been excessive, and we expect this currency pair to rebound to 150 in the fourth quarter of 2024.

"Stock investors are really concerned about exchange rates before the next earnings season." said Yoshitaka Suda, cross-asset strategist at Nomura Securities. The unexpected rate hike by the Bank of Japan in July led to a surge in the yen and a sharp drop in the stock market, which the market is highly sensitive to. Traders hope that this interest rate decision will bring a different market reaction.

With the yen-to-dollar exchange rate rebounding 9.4% from its low point on July 10th, excessive yen appreciation may prompt the Bank of Japan to be more cautious when raising interest rates, especially with the upcoming leadership election in the Liberal Democratic Party.

Kohei Onishi, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities, pointed out that the impact of foreign exchange on the volatility of the Japanese stock market may weaken. He believes that the yen may gradually strengthen in the future, but the trend itself will be much more moderate