NIKKEI225 One of Few Major Indices in the Green Today After Friday’s Strong NFP Data.

GDP data showed the Japanese economy contracted over Q1 by 1.8%, compared to a growth of 0.4% the previous quarter.

Despite the data showing a contracting economy over the last quarter, the NIKKEI225 rallied. While most of the major stock indices are in the red after strong jobs data in the US. The market is seeing a higher probability of tightening policies from the BoJ.

Most economists and analysts are predicting the central bank will shrink its bond buying program going forward. Recent comments from various officials about concerns of a weakening yen are creating the perception the BoJ will buy fewer bonds to raise yields and protect the yen.

Higher bond yields will help the yen maintain a higher forex rate but at the same time, it will make holding stocks less appealing. To add to this hawkish policy, there is also a looming possibility of a rate increase.

In a survey conducted by QUICK between May 28 and 30, 38% of the interviewed forecast a rate hike in the July 31 meeting, and 32% expect one in the October meeting.

For the next meeting on June 14, the consensus is for a hold on rates, but the market is expecting a reduction in bond purchases for the next quarter.

Reducing the balance sheet through smaller bond purchases effectively constitutes a tightening policy without implementing rate hikes. The quantity of the reduction is expected to be around 1 trillion yen, from 6 trillion to 5 trillion monthly.