Stepped-Up Global Easing Risks Making It Harder for BOJ to Hike
(Bloomberg) -- Bets on more aggressive monetary easing in a number of advanced economies risk making the Bank of Japan stand out all the more for contemplating raising, not lowering interest rates.
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Bank of England Governor Andrew Bailey said his central bank can become “a bit more activist” in its approach to lowering rates, in remarks published Thursday. The euro is heading for its longest daily losing streak since April as traders speculate on an increasingly aggressive rate-cut path at the European Central Bank. Weak economic data in Canada and Sweden have also raised odds on further easing in those markets.
“The step-up to faster easing” outside of Japan means “the BOJ has to be careful,” Krishna Guha and Marco Casiraghi, central bank analysts at Evercore ISI, wrote in a note Thursday. “It will be harder to move rates up as others cut faster.”
The wild card is the Federal Reserve, which backed a historically big 50-basis-point cut to kick off its normalization cycle last month, but now may be poised for a smaller move in November. When a surprisingly weak US jobs report at the start of August spurred expectations for stronger Fed action, it came on the heels of Japan’s central bank having just hiked rates. That combination resulted in a record meltdown in Japanese equities that reverberated globally.
Worries about the implications of further BOJ tightening against a global backdrop of easing were again on display this week, with newly selected Prime Minister Shigeru Ishiba taking the unusual step of delivering what seemed to be a policy instruction to the central bank — saying Japan wasn’t ready for more rate hikes yet.
“Western central banks turning dovish has already likely affected the BoJ’s plans to normalize, and that will be even more the case if the Fed in particular ends up being more dovish” than US central bank forecasts suggest, said Ajay Rajadhyaksha, chair of global research at Barclays.
Further indications for the Fed loom from the September employment report Friday morning. Economists expect a 150,000 gain in payrolls, slightly higher than in August and notably better than the 89,000 for July that had stoked a narrative the Fed might be behind the curve in easing policy.
By contrast, in Japan, the concern has been over whether the BOJ may get too far ahead of the curve. At the end of July, Governor Kazuo Ueda and his colleagues suggested in their policy statement that they would continue raising rates, after having pulled the trigger twice this year. The BOJ hadn’t increased rates since before the global financial crisis. Its benchmark remains the lowest in the developed world, at just 0.25%.
“The dynamics are different for Japan, especially given where dollar-yen is trading,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.
The yen surged last Friday after the candidate to run Japan’s ruling party who had vocally opposed rate increases — Sanae Takaichi — lost to Ishiba, who was perceived as comfortable with BOJ normalizing policy. Japanese stocks then plunged after they absorbed the news in Monday’s session.
“It was a bit of a surprise” for the markets, Chandler said.
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With Ishiba calling an election for late this month, his newly installed cabinet had little interest in seeing a destabilizing plunge in equities that risked hurting business confidence. After his cabinet members highlighted that putting Japan’s long period of deflation behind remained the top priority, he himself met with the BOJ governor Wednesday — at an unusually early stage in his premiership.
“I don’t think the environment is ready for an additional rate hike,” Ishiba said after his session with Ueda.
The BOJ governor himself pointed to the international backdrop as a factor in considering the pace of further normalization in Japanese rates. “Starting with the US economy, the outlook of the global economy is uncertain and financial markets remain unstable,” Ueda said in a speech Wednesday. “We will watch these developments with an extremely high sense of urgency for the time being.”
“Ishiba and Ueda appear to be aligned on a key point — now is not the time to raise rates further,” said Kimura at Bloomberg Economics. “Come January, though, we think the environment will be more conducive for another rate hike.”
Should Japan’s inflation remain above target, the danger of waiting too long could mean the BOJ ends up emulating the Fed’s tardiness in 2021 and early 2022 in arresting a surge in the cost of living. Japan’s core consumer price index, which excludes fresh food, rose 2.8% in August from a year before.
A belated and clumsy BOJ rate hike to catch up with price pressures could risk tipping the apple cart for investors once again. But if the easing by Japan’s counterparts around the world — including China, where the government has unleashed a wave of fresh measures — helps to shore up growth and keep markets stable, that could give Tokyo breathing space.
“Moves that strengthen the global expansion will allow the BOJ to continue to advance rate normalization at home,” Guha and Casiraghi wrote. The duo didn’t exclude a possible December move, though see January as more likely.
--With assistance from Toru Fujioka.
(Updates with analyst comment in sixth paragraph.)
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