Bets on more aggressive monetary easing in many advanced economies could give the Bank of Japan a more prominent spotlight on considering raising interest rates rather than cutting them.

Bank of England Governor Andrew Bailey said his central bank could become "more aggressive" in lowering interest rates in a speech on Thursday. The euro is facing its longest daily losing streak since April as traders speculate the European Central Bank will take an increasingly aggressive path of rate cuts. Weak economic data from Canada and Sweden also raised the odds for further easing in those markets.

The “accelerating pace of easing” outside of Japan means “the Bank of Japan must be careful,” Krishna Guha and Marco Casiraghi, central bank analysts at Evercore ISI, wrote in a memo Thursday. “Raising rates will become more difficult as other countries accelerate rate cuts.”

The biggest uncertainty is the Fed, which backed a historic 50 basis point rate cut last month to kick-start its normalization cycle but may now be ready to make a smaller cut in November. When an unexpectedly weak U.S. jobs report in early August fueled expectations of stronger Fed action, the Bank of Japan had just raised rates. The combination led to a record collapse in Japanese stocks that sent shockwaves around the world.

Concerns were expressed again this week about the impact of further Bank of Japan tightening policy amid global easing, with new Prime Minister Shigeru Ishiba taking the unusual step of appearing to send a policy directive to the central bank that Japan is not ready to raise rates again.

“The Bank of Japan needs confirmation of a soft landing for the U.S. economy before reducing further stimulus,” said Taro Kimura, senior Japan economist at Bloomberg Economics.

With the September U.S. jobs report set to be released on Friday, the evidence will either support or undermine the U.S. soft landing scenario. Economists expect 140,000 new payrolls, slightly above August's level and significantly better than July's 89,000, which fueled a narrative that the Fed may be behind the curve in easing policy.

In Japan, by contrast, the worry is whether the Bank of Japan might be moving too fast. In late July, Ueda and his colleagues signaled in their policy statement that they would continue to raise interest rates, having already triggered that move twice this year. The Bank of Japan has not raised rates since the global financial crisis. Its benchmark rate remains the lowest in the developed world at just 0.25%.

"The situation in Japan is different, especially given where the dollar is trading against the yen," said Marc Chandler, chief market strategist at Bannockburn Global Forex.

The yen rose sharply on Friday after ruling party candidate Sanae Takaichi, who opposes rate hikes, lost to Shigeru Ishiba, who is seen as supporting the Bank of Japan's policy normalization. Japanese stocks then plunged after pricing in the news in Monday trading.

“It was a bit of a surprise to the market,” Chandler said.

Central banks used to be the lone heroes in the fight against inflation. But their missteps in managing post-pandemic price surges and rising risks of supply shortages from wars, tariffs and climate shocks mean the fight ahead may be more of a team sport.

Shigeru Ishiba announced an election later this month and his newly appointed cabinet has no appetite for a damaging stock market plunge that could hurt business confidence. He himself met with the Bank of Japan governor on Wednesday, an unusually early move in his tenure, after cabinet members stressed ending Japan’s long deflation as a top priority.

“I don’t think the environment is ready for another rate hike,” Ishiba said after talks with Ueda.

Ueda pointed to the international backdrop as one of the factors in considering the pace of further normalization of interest rates in Japan. “The outlook for the global economy, starting with the U.S. economy, is uncertain and financial markets remain volatile,” Ueda said in a speech on Wednesday. “We will closely monitor these developments with a high sense of urgency.”

“Ishiba and Ueda seem to agree on one key point — now is not the time to raise rates further,” said Kimura of Bloomberg Economics. “However, by January, we think the environment will be more conducive for another rate hike.”

If Japan’s inflation stays above target, the danger of waiting too long could mean the Bank of Japan ends up following the lead of the Federal Reserve, which was slow to curb a surge in living costs in 2021 and early 2022. Japan’s core consumer price index, which excludes fresh food, rose 2.8% in August from a year earlier.

A late and clumsy BOJ rate hike could risk sending investors reeling again. But if easing by Japan’s global partners helps support growth and keep markets stable, it could give Tokyo some breathing room.

“Steps to strengthen the global expansion will allow the Bank of Japan to continue its domestic interest rate normalization,” Guha and Casiraghi wrote. They did not rule out a move by the Bank of Japan in December, though like Kimura they saw January as more likely.

The article is forwarded from: Jinshi Data