Tomorrow Is A Big Day For Central Banks — Here's What You Need To Know

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Haruhiko Kuroda

REUTERS / Toru Hanai

Bank of Japan Governor Haruhiko Kuroda

Overnight, the Bank of Japan holds its first monetary policy meeting since going big with an unprecedented-in-scale bond buying program last month.

Then, Wednesday morning, Federal Reserve Chairman Ben Bernanke testifies before the Joint Economic Committee of Congress.

As central banks are seen to have a lot of influence in financial markets these days, investors will be watching both events closely.

The Bank of Japan is not expected to unveil any new policy measures at its meeting.

Nonetheless, BofA Merrill Lynch Japan economists  Masayuki Kichikawa and  Setsuko Yamashita flag what to watch for:

We do not expect the BoJ to make any changes to its monetary policy framework at its Monetary Policy Meeting (MPM) scheduled for 21-22 May. For the coming 3-6 months, the central bank will try to implement its "quantitative and qualitative easing" (QQE) program adopted on 3-4 April as smoothly as possible, while assessing its impact. Currently, the strong yen has corrected, with the yen-dollar rate dropping to ¥102/US$ for the first time in four years and seven months, while equity prices also continue to rise, and the BoJ is unlikely to consider further easing under such circumstances.

In our view, key themes at the next meeting are likely to be progress in implementing QQE, and, what the data are suggesting about the economy and inflation (including inflation expectations). In this QQE one-month spot check, the most important issue is how the BoJ should interpret the recent rise in JGB market volatility and how it can improve the implementation of QQE.

Bernanke's testimony is being billed as the event of the week amid a relatively slow economic data calendar.

Miller Tabak's Andrew Wilkinson previews the testimony and offers thoughts on possible market reactions to what Bernanke says:

Second, for it to build on already heady gains – the market closed 1,000 points off its March 2009 lows on Monday - the stock market needs a green light from Mr. Bernanke. Any reference to future bubbles building in “certain” asset classes or financial markets will be cause for a sell off in stocks. However, the Fed has developed ‘asset patrol committees’ in the aftermath of the financial crisis whose role it is to monitor developments in financial markets and send up distress flares when unusual correlations begin. Thus far they have only spotted minor solar flares in some asset markets, but nothing to worry about.

If Mr. Bernanke is grilled on the topic of the advancing stock market, we expect he will explain it in terms of a revaluation of earnings potential as a consequence of several years of financial repression rather than blaming it on ‘irrational exuberance’. He has said it before and we expect him to say it again, the stock market is hardly overvalued despite its recent rise.

Bernanke's testimony begins at 10 AM ET. Follow it LIVE on Business Insider >



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