The Bank of Japan is widely expected to keep its benchmark interest rate unchanged at the end of its meeting on Friday, leaving traders closely watching for any clues on the prospects for a rate hike later this year.
All 53 economists polled expected the Bank of Japan to keep interest rates at 0.25% at the end of the two-day meeting. They will be watching closely how the Bank of Japan communicates its likely policy trajectory, as its messaging has drawn criticism after it raised rates in July and sent hawkish policy signals. It was seen as contributing to a massive sell-off in global financial markets in early August.
In a series of recent speeches, senior BOJ officials have made clear they will raise rates further if inflation tracks in line with the bank’s forecasts. Meanwhile, six of the nine board members, including Kazuo Ueda, stressed the need to monitor financial markets that are still seen as volatile in their speeches after the July meeting, suggesting they do not plan to act this week.
The outlook for policy beyond September has become somewhat hazy as Bank of Japan watchers are divided. With the Federal Reserve finally turning to rate cuts like most of its peers, the momentum of the global easing cycle is gathering. Against this backdrop, market pricing suggests that it may be difficult for the Bank of Japan to raise rates again this year. However, about 70% of economists surveyed by Bloomberg expect it to raise rates again by December.
The market crash in early August cost Japanese stocks $1.1 trillion in three trading days. While stock prices have since pared losses, market volatility has remained high among major global indices. In light of this, Ueda is expected to do his best to carefully tailor his communications when he speaks at today's press conference.
"Our base case is that Bank of Japan Governor Kazuo Ueda will hold off on policy at this week's meeting and leave room for an October rate hike, but he may signal that the central bank may wait longer before the next rate hike," said Bloomberg economist Taro Kimura.
Here are some things to note:
Focus will be on whether Ueda signals the possibility of a rate hike at the October or December meeting. People familiar with the matter said earlier that Bank of Japan officials have not ruled out the possibility of another rate hike this year or in early 2025.
Ueda is likely to say the recent economic performance has been in line with the bank’s expectations after economic data showed solid wage growth and firming inflation.
The Bank of Japan is likely to say upside risks to inflation have receded after the yen reversed sharply in recent weeks, taking some pressure off the central bank.
With market volatility high, the bank is likely to emphasize the importance of monitoring financial markets and their impact on the economy and inflation. BOJ watchers will be looking for signs of how long the authorities expect the unsettling price moves to last, with possible risk events including the Fed's efforts to ensure a soft landing and the U.S. presidential election in November.
Ueda is likely to be asked about the potential impact of a Sept. 27 leadership election for the ruling Liberal Democratic Party, which will almost certainly determine the next prime minister given the party’s dominance in parliament. Ueda is likely to respond with a standard pledge to continue policies that favor price stability.
As the Bank of Japan is about to announce its interest rate decision, Japan's key inflation indicator accelerated for the fourth consecutive month in August. According to data released by the Ministry of Internal Affairs and Communications on Friday, consumer prices (CPI) excluding fresh food rose 2.8% year-on-year, accelerating from 2.7% in July due to further increases in processed food costs. This result was in line with consensus expectations.
“With prices remaining relatively stable, the Bank of Japan can be said to be on track to reach its 2 percent price stability target,” said Yuichi Kodama, an economist at Meiji Yasuda Research Institute. “Another rate hike is still possible this year.”
Kimura said Japan's August CPI rise could bolster the Bank of Japan's confidence that inflation is now supporting underlying price trends, supported by strong wage growth.
Mitul Kotecha, head of Asian FX and emerging market macro strategy at Barclays, said the yen could fall further against the dollar despite the prospect of further rate cuts from the Federal Reserve and further rate hikes from the Bank of Japan in the coming months. "What we've seen is that the dollar tends to weaken ahead of the first rate cut by the Fed, and then stabilize and strengthen after the cut," he said.
Options show yen bulls have taken a hit to their confidence this month. One-week risk reversals, a barometer of market positioning and sentiment, show the yen the least bullish against the dollar in two months and the least bullish against the euro since March.
Article forwarded from: Jinshi Data
