Japanese Stocks Falter Ahead of BOJ Policy Decision

Japanese stock markets declined on Tuesday while the yen was stable ahead of the Bank of Japan’s (BOJ) meeting later in the day, which may result in a historical pivot from an ultra-loose monetary policy.

The Nikkei 225 index fell 0.17%, while the broader TOPIX index was trading 0.49% higher. The country’s 10-year government bond yield slipped to 0.73%, while the safe-haven yen was steady at 149.78 against the US dollar.

The Nikkei has retreated from record highs over the last week on concerns over the BOJ’s potential exit from its stimulus program, which has been a considerable help to Japanese markets for almost a year.

Regional markets also edged lower, barely finding strength from Wall Street’s upturn at the end of the session. US stock index futures posted losses in Asian trade as a slight rebound in tech shares faded.

Potential BOJ Pivot in Focus

Markets await a couple of key central bank interest rate decisions this week, with the BOJ taking the lead on Tuesday.

The two-day meeting of the Japanese central bank is due to conclude later in the day. The BOJ is widely expected to announce its first rate hike in 17 years and an end to its yield curve control (YCC) program, allowing for the first policy tightening.

The central bank is also seen guiding the overnight call rate to 0.1% from 0% and replacing the -0.1% rate on excess reserves financial institutions are charged with a positive overnight rate.

The prospect of a BOJ pivot has significantly strengthened in recent weeks amid sticky inflation in the country. The Japanese Trade Union Confederation (RENGO) stated on Friday that the country’s largest corporations have increased wages for this year to a 33-year high of 5.28%.

Still, analysts anticipate a gradual and cautious approach to policy tightening, an outcome that the market is unlikely to cheer for.

However, economists said there is a small likelihood that the BOJ will signal a hawkish stance, and the market’s response could be significant for the yen and Japanese government bonds.

Possible hawkish cues from the Federal Reserve remained a main subject of worry for markets. The Fed is expected to maintain the benchmark interest rates at 5.25%-5.50% on Wednesday.

Other regional central bank meetings are also in focus, with the Reserve Bank of Australia (RBA) widely seen leaving rates unchanged and staying hawkish later in the day.

The People’s Bank of China (PBOC) is also due to announce its decision on its loan prime rate (LPR), and it is forecast to keep rates steady on Wednesday.