Asia wrap: Bank of Japan's turn

Stephen Innes SPI Asset Management

BoJ

Market participants eagerly await the Bank of Japan's (BoJ) policy decision on Friday, especially after Governor Kazuo Ueda remarked on negative interest rates and the Yen's depreciation. The BoJ faces a tricky balancing act as they aim to manage currency stability and economic goals amid potential central bank intervention and a widening yield gap with the US.

Still, The Bank of Japan is expected to maintain ultra-low interest rates on Friday, reassuring markets that monetary stimulus will continue, at least for now. This is due to the economic struggles in China and the global impact of US interest rates.

Due to uncertainty about wage trends, there is no agreement among BOJ officials on the timing or order in which they should end their policy of negative short-term interest rates and a bond yield cap. This is according to three sources familiar with the bank's thinking.

FOMC recap

The recent FOMC meeting provided more hawkish interest rate projections than expected. Most 12 members voted for another rate hike in 2023, while the median projection showed a 50 basis points (bps) reduction in rate cuts for 2024, down from the previous forecast of 100 bps in June. Despite this, it's important to note that the meeting did not strongly signal a rate hike in November, primarily due to the ongoing inflation forecast, which remains relatively high.

The expectation is that better news regarding inflation, progress in labour market rebalancing, and a potential slowdown in growth in the fourth quarter will likely convince the FOMC not to raise rates again this year. However, the meeting has raised the threshold for rate cuts in the next year, pushing the first anticipated cut from 2024Q2 to 2024Q4.

While there have been mixed opinions in the markets about the likelihood of rate cuts, the FOMC's shift away from the belief that tightening policy might negatively impact growth with a lag next year weakens the case for cutting rates. This means that inflation would likely need to decrease more than previously assumed for the FOMC to consider rate cuts.

Author

Stephen Innes

SPI Asset Management

With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

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