2023-12-14 17:38:35
The Bank of Japan is likely to end the year as one of the world’s most accommodative banks, at a time when policymakers are looking for clues on whether the economy can weather external risks and achieve sustainable growth.
With consumption showing signs of weakness and continued uncertainty over next year’s wage outlook, the Bank of Japan is widely expected to maintain its ultra-loose policy settings next week..
Markets are instead focusing on any hints Governor Kazuo Ueda may offer in his post-meeting briefing about the timing of an exit from negative interest rates.
“Next year’s wage talks are likely to be fairly robust, but the Bank of Japan may need more time to determine whether inflation will become inflation-driven,” Shigeto Nagai, head of Japan’s economics department at Oxford Economics, said in comments quoted by Archyde.com. “More local demand.”
“The most likely timing for exit is April, after which the BOJ will likely guide short-term interest rates in a range of zero to 0.1 percent,” said Nagai, the former Bank of Japan official.
At a two-day meeting that ends on Tuesday, the Bank of Japan is expected to make no major changes to its policy that guides short-term interest rates at -0.1 percent and the 10-year bond yield around 0 percent.
While the Bank of Japan’s quarterly survey underscored the strength of Japan’s corporate sector, some policymakers point to weak signals in consumption and global economic uncertainties as factors that call for maintaining the status quo.
Archyde.com quoted an informed source – a view echoed by two other sources – as saying: “We see some positive signs about the wage outlook. But we have not yet seen evidence that wages will actually rise on a large scale.”
Ueda has repeatedly said the Bank of Japan should maintain an ultra-loose policy until recent cost-driven inflation turns into price rises driven more by strong consumption and rising wages.
But a sharply changing global monetary policy environment may complicate the Bank of Japan’s decision with US and European central banks signaling they are done raising interest rates.
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The influence of the US Federal Reserve
The Federal Reserve on Wednesday signaled the possibility of several interest rate cuts next year, which, coupled with rate hikes in Japan, could sharply reverse the yen’s downward trend.
While Bank of Japan officials are downplaying the impact the Fed’s move could have on their policy decisions, some analysts say any rise in the yen’s value could hurt the profits of major manufacturers and discourage them from raising wages.
In this regard, Mazen Salhab, chief market strategist at BDSwiss MENA, said in exclusive statements to “Iqtisad Sky News Arabia” website, that it is clear that pressures are mounting on the Bank of Japan, which remains the only central bank among the major advanced economies that has negative interest rates ( -0.10 percent).
Salhab attributes the reason for the direction of the Bank of Japan’s monetary policy to the fact that Japan is a unique country in its demographics, “aging rapidly,” and the percentage of people over the age of 60 is much higher than other economies in China and India, for example, and therefore the level of consumption and its mechanisms differ from America. It is the Bank of Japan’s mission and interest to keep the yen weak. To stimulate exports, which constitute the backbone of the Japanese economy.
He explains that the weak yen makes Japan a less expensive country for tourism and investment. Compared to the stronger US dollar, for example, adding: “And let us not forget the harsh competition with China, and the yuan, which China is constantly trying to support.”
He points out that if we take into account that Japanese inflation continues to decline relatively, reaching 3.3 percent two months ago (the central bank’s target is 2 percent), and the recent decline in oil prices, which constitute an important part of the Japanese consumer price index; It can be said that the central bank may intervene to raise interest rates to 0 percent at the very least.
He believes that even if this increase remains at zero, it is considered a radical change and the first since 2016, when the interest rate decreased from 0 percent and did not increase after that.
Regarding what this means for financial and investment assets, it appears that the yen will then be on the verge of rising, as it may reach 137 yen against the US dollar in 2024. Likewise, yields on Japanese government bonds may stabilize close to 0.40%, which is currently at 0.673% for 10-year Japanese government bonds.
Salhab also warns that the Nikkei 225 index, which achieved gains of 26 percent in 2023, may not have the same momentum, given our belief that there are Japanese assets with very high levels of quality and classification.
It is believed that the Central Bank of Japan will not wait until the end of the year to make a change in monetary policy, but at the same time the interest rate hike will not be strong. Because it will be in complete contrast to the rest of the central banks, and it will not risk sending the economy into recession.
The chief market strategist at BDSwiss MENA concludes that the Bank of Japan’s mission seems more complex than the European Central Bank and the US Federal Reserve. Because it has lost the element of benefiting from the weak negative interest rate, bearing in mind that the Bank of Japan’s policy will remain accommodative and not as stringent as some expect.
There is no consensus within the Bank of Japan on the timing of exit, with the nine-member board divided over how long they should wait in determining whether Japan will see inflation permanently achieve the bank’s 2 percent target, accompanied by strong wage gains.
More than 80 percent of economists polled by Archyde.com in November expect the Bank of Japan to end its negative interest rate policy next year, and half of them expect April to be the most likely timing. Some see an opportunity for a policy shift in January.
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Yen value
For his part, Ahmed Azzam, a senior financial markets analyst at the Equity Group, indicated in exclusive statements to the “Eqtisad Sky News Arabia” website that the recent rise in the Japanese yen gave the Japanese government the satisfaction of not interfering in the exchange rate of the local currency.
He adds: “The adjustment to control the bond yield curve was a good driver of demand for the local currency, in addition to pricing other markets to begin the possibility of reducing interest rates in major economies, which pushed the Japanese yen positively against other currencies.”
It is reported that high inflation numbers, which are higher than the bank’s target for more than a year, may push the Bank of Japan to exit the negative interest policy adopted for many years in the year 2024. This is a tool that can be used to try to curb inflation in Japan.
He added: “But the timing of raising interest rates remains highly uncertain, given that the Japanese economy is currently considered fragile in relation to current numbers. Concern has risen due to recent signs of weak consumption, in addition, of course, to the fact that wages have not yet risen enough to compensate for the rise.” Cost of living due to high inflation numbers in the recent period,” indicating that real wages adjusted for inflation declined by 2.3 percent on an annual basis, which is the 19th consecutive month of declines.
Looking at the economic data in light of the existing numbers, he believes that the only thing that is scary about the economic numbers are the growth numbers, which are considered somewhat scary for entering into monetary policy renewal. But the tool that can be used and exited after using control of the bond yield curve is certainly the use of raising interest rates.
He added: The Bank of Japan may begin to pave the way to begin renewing monetary policy. In the upcoming meetings, the market will often give a signal that the time is approaching, especially with the high inflation numbers. Then it begins the process of raising interest at the end of the first half of 2024 or at the beginning of the second half. Especially if wages recorded some recovery.
He believes that if Japan adopts a strict policy in 2024 while other major economies tend to reduce interest rates; This may give the Japanese yen positive strength as a performance against currencies, and we could witness the Japanese yen performing positively, making it a dark horse in 2024 against other currencies.
This shows that major banks or economies were adopting a renewal of monetary policy in the last period of 2021 and 2022, while the Bank of Japan was following a facilitating policy (low interest rates) and buying bonds in a large way, especially since the Bank of Japan owns the most government bonds compared to other banks. Then the major economies will move to reduce interest rates. While, on the other hand, it is possible that the Bank of Japan will turn to the role of renewing monetary policy and its direction of raising interest rates.
He adds that this could constitute a deviation in monetary policies among major economies. Which gives preference to the Japanese yen; Due to the rise in interest rates as an advantage in performance compared to other currencies, which will follow a policy formation and follow interest rate reductions. Therefore, I believe, this is why the deviation of monetary policies could be positive for the Japanese yen by recording positive performance against other currencies.
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