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JAPAN yen reaches 24-year lows. Some tips about what to anticipate at another BOJ meeting

The Japanese yen is hovering near its weakest levels since 1998, and authorities have hinted at taking action to stem the currency’s decline.

Before Bank of Japan’s rate decision later this week, CNBC requires a look at whether Japan’s central bank might shift from its ultra-loose monetary policy, because the Federal Reserve maintains its hawkish stance, signaling more aggressive rate hikes ahead.

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The widening rate differential has caused the yen to weaken significantly, with japan currency falling about 25% year-to-date.

The other day, the lender of Japan reportedly conducted a forex “check,” in accordance with Japanese newspaper Nikkei a move largely viewed as finding your way through formal intervention.

The so-called check, because the Nikkei explained, involves the central bank “inquiring about trends in market” and is widely regarded as a precursor to physical intervention to guard the yen.

Despite talk of a physical intervention in the forex markets, analysts are pointing to some other cause of the weakening yen: the lender of Japan’s yield curve control (YCC) policy a technique that has been implemented in 2016, which caps 10-year Japanese government bond yields around 0% and will be offering to get unlimited level of JGBs to guard an implicit 0.25% cap round the target.

Unlikely BoJ will do anything 'worth changing market perspectives' this week: Strategist

The yield curve control policy aims to create inflation in Japan to a 2% target. On Tuesday, Japan reported that core inflation rose 2.8% from the year ago in August, the fastest growth in nearly eight years and the fifth consecutive month where inflation exceeded the BOJ’s target.

HSBC’s Senior Asia FX Strategist Joey Chew said defending this policy will be the central bank’s priority rather than a currency intervention, which may be decided by the Ministry of Finance, and completed by the lender of Japan.

Talk of FX intervention as of this juncture might not have a material impact. Even actual intervention may only result in a big but short-lived reaction

Joey Chew

Senior Asia FX strategist, HSBC

“The BOJ will undoubtedly be conducting bond purchases theoretically unlimited to keep up its yield curve control policy,” Chew told CNBC the other day. She added that such monetary operations will be somewhat contradictory to any potential forex action, given dollar-yen sales would tighten japan currency’s liquidity.

“Talk of FX intervention as of this juncture might not have a material impact,” said Chew. “Even actual intervention may only result in a big but short-lived reaction.”

Chew pointed to limitations from previous times when Japan stepped directly into defend its currency.

I wouldn't expect the Japanese yen to be 'way weaker' than it already is, says economist

Strategists at Goldman Sachs also don’t start to see the central bank shifting from its yield curve control policy, pointing to its hawkish global peers.

“Our economists expect the BOJ to firmly maintain steadily its commitment to YCC policy as of this week’s meeting against a backdrop of five other G10 central banks which are all more likely to deliver large rate hikes,” they said in an email earlier this week.

Goldman Sachs says though direct intervention ought to be much more likely with reports of rate checks, economists start to see the chance of an effective operation in defending the yen as “even lower.”

End of Abenomics

Monetary policy changes by Japanese authorities is unlikely, chances being especially low under BOJ governor Harukiho Kuroda, UBS Chief economist for Japan Masamichi Adachi told CNBC the other day.

“One possibility they would deliver is amending its current neutral to dovish forward guidance to just neutral or deleting it,” he said, adding the probability reaches maximum 20% to 30%.

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Among the first indicators in a shift in Japan’s monetary stance will be stepping from Prime Minister Fumio Kishida’s predecessor Shinzo Abe’s economic policy, widely known as Abenomics, in accordance with Nomura.

“The initial necessary step toward normalization will be for Prime Minister Kishida showing that his policy priority has diverged from Abenomics, and he’ll no more tolerate further yen depreciation,” said Naka Matsuzawa, chief Japan macro strategist at Nomura the other day.

THE LENDER of Japan’s next two-day monetary policy meeting concludes on Thursday, 1 day following the U.S. Federal Open Market Committee meeting, where officials are widely likely to hike interest levels by another 75 basis points.

The legacy of Shinzo Abe's Abenomics

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