The Bank of Japan announced its interest rate decision and outlook report. Then, Bank of Japan Governor Kazuo Ueda held a monetary policy press conference. The policy committee will also debate whether to raise short-term interest rates from 0-0.1%, and the two camps may be evenly matched. However, Japanese media reported that the Bank of Japan may discuss a 15 basis point rate hike.
Bank of Japan expected to halve bond purchases in 18 months to 2 years
The Bank of Japan will detail plans to reduce its high bond purchases on Wednesday and debate the timing of the next rate hike, showing that the Bank of Japan is determined to steadily unwind a decade of massive monetary stimulus.
The decision comes as the Federal Reserve seeks to cut interest rates (possibly as early as September) and reverse the aggressive rate hike cycle that has pushed up the dollar and caused painful yen selling in Japan.
Expectations of a narrowing U.S.-Japan interest rate gap have lifted the yen off a 38-year low, taking some pressure off the Bank of Japan. The central bank needs to combine rate hikes with an ambitious bond-buying reduction plan to slow the yen's decline.
But analysts say the yen's rebound also gives the central bank an opportunity to raise rates without giving the impression that it is directly targeting the yen's movements through monetary policy.
"The Bank of Japan can move in either direction. If it wants to raise rates now, it can say that consumption will rebound due to rising wages. If it wants to play it safe, it can wait for more data. In any case, the consumption outlook is key," said Yoshiki Shinke, an economist at Dai-ichi Life Research Institute.
While the Bank of Japan has insisted it will not use monetary policy to influence foreign exchange movements, growing concerns about yen weakness have prompted some government and business leaders to call on the central bank to speed up adjustments to near-zero interest rates.
Japan's new finance minister, Atsushi Mimura, said Japan will maintain its basic strategy on the yen and intervention remains an option to deal with excessive exchange rate fluctuations. Mimura said decades of deflation have indeed weakened the yen's effective exchange rate and the only and natural solution is to improve Japan's economic competitiveness and boost Japan's growth potential.
The Bank of Japan will make a decision on its quantitative tightening (QT) program at a two-day meeting that ends on Wednesday. The plan could halve monthly bond purchases within a year and a half to two years - roughly in line with mainstream market forecasts.
Bank of Japan officials to discuss timing of rate hikes, with views likely to be evenly matched on whether to act in July
The Bank of Japan is considering raising short-term interest rates to around 0.25% from the current 0-0.1%, according to Japan's Jiji Press. NHK also reported that the Bank of Japan would consider raising rates, with many board members believing inflation is accelerating, in line with their forecasts. Nikkei also reported that the Bank of Japan will consider raising rates to 0.25% at the meeting and also consider deciding to reduce the size and pace of its monthly purchases of Japanese government bonds.
While many market participants expect the Bank of Japan to raise rates this year, there is disagreement on the timing of the action. A July 10-18 survey of economists showed that more than three-quarters of economists expect the Bank of Japan to remain on hold this month. Money markets are pricing in a 64% chance of a 10 basis point rate hike by the Bank of Japan.
The Bank of Japan’s decision will come hours before that of the Federal Reserve, which is likely to keep interest rates steady and cut them as early as September.
The policy board will expect inflation to remain around 2% for the next few years
Japan’s economy is at an inflection point, with core inflation holding above the Bank of Japan’s 2% target for more than two years and workers’ base wages gaining the most in three decades.
But rising living costs have hurt consumption, pushing the economy into contraction in the first quarter and raising doubts about whether households can withstand further price increases.
Still, with inflation keeping real borrowing costs low, the Bank of Japan is likely to show some signs of steadily raising rates through 2026 to remove what it sees as excessive monetary support.
Those clues or guidance on the path of future rate hikes are likely to come from central bank Governor Kazuo Ueda’s post-meeting press conference or the quarterly outlook report released after the meeting.
In the report, the Bank of Japan is likely to broadly stick to its April forecast that inflation will remain around its 2% target for the next few years, sources said.
Ueda has said the central bank will raise rates further if it is convinced that wage increases will push up service sector inflation and keep inflation near its 2% target for a long time.
Institutions take a calm view of the yen's rebound
"There has been quite a bit of volatility in the yen recently," said Shaun Osborne, chief foreign exchange strategist at Scotiabank. "Some people think that this trend may have ended, but I think there is still room for further unwinding of some of these carry trades and some positions."
Osborne believes that the fair value of the yen against the dollar is about 145, and said that "there is still a way to go before the yen short trade is fully liquidated and may even be reversed."
Brad Bechtel, global head of foreign exchange at Jefferies in New York, believes that further gains in the yen may be temporary as the currency is expected to continue to be affected by the excessive U.S.-Japan interest rate differential.
简体中文
ภาษาไทย
繁體中文
Indonesia
2024-07-31
495
