The 'Global Central Bank Super Week' has come to a close.
After the Federal Reserve significantly reduced interest rates by 50 basis points, the Bank of Japan has decided not to raise interest rates for now. On the morning of September 20th, the Bank of Japan announced that it would not raise interest rates temporarily and would keep the policy rate unchanged at 0.25%, which is in line with market expectations. The Bank of Japan unexpectedly announced a rate hike at the end of July, raising the policy rate to 0.25%.
Just now, Bank of Japan Governor Kazuo Ueda's speech at the press conference after the meeting sent a heavy signal. Kazuo Ueda stated that if Japan's economic and price prospects are realized, policy interest rates will continue to be raised accordingly. Due to recent foreign exchange fluctuations, the risk of price increases has decreased, so there is still some time left for monetary policy decisions.
The inflation situation in Japan is also an important reference for the Bank of Japan's monetary policy choices, which may directly determine the timing of the next interest rate hike. On September 20th, the National Bureau of Statistics of Japan released the price index for August this year, with inflation accelerating for the fourth consecutive month, far exceeding the 2% inflation target set by the Bank of Japan.
The Bank of Japan announces
On the morning of September 20th, the Bank of Japan announced that it would not raise interest rates temporarily and would keep the policy rate unchanged at 0.25%, which is in line with market expectations. This interest rate resolution was approved by the vote of all attending officials.
Prior to this, the Bank of Japan unexpectedly announced a rate hike at the end of July, deciding to adjust the policy rate from 0-0.1% to 0.25%. This decision to raise interest rates once caused a global market crash, resulting in a 'Black Monday'.
From the policy statement, the Bank of Japan's stance is optimistic and implies that it will cautiously further tighten its policies.
The Bank of Japan stated that despite the impact of rising prices and other factors, private consumption has been on a moderate growth trend, indicating that the Japanese economy is recovering moderately and may achieve growth above potential.
In terms of inflation, the Bank of Japan stated that as the virtuous cycle of "wages prices" gradually strengthens, inflation is expected to maintain an upward trend. It is expected that by the fiscal year 2025, the CPI growth rate excluding fresh produce will be pushed up.
The Bank of Japan stated that as the output gap gradually improves, long-term inflation expectations will gradually rise as the "wage price" virtuous cycle continues to strengthen. Basic CPI inflation is expected to gradually increase, and the core inflation rate may gradually rise.
The Bank of Japan expects that inflation levels will be roughly in line with the Bank of Japan's price target through the second half of the 2026 fiscal year, which is a three-year forecast period.
At the same time, the Bank of Japan stated that the uncertainty of economic activity and prices remains high, and in this situation, it is necessary to pay appropriate attention to the development of financial and foreign exchange markets and their impact on Japan's economic activity and prices.
The decision of the Bank of Japan points out that as corporate behavior has recently shifted more towards raising wages and prices, exchange rate fluctuations are more likely to affect prices compared to the past.
After the resolution was announced, the exchange rate of the Japanese yen against the US dollar continued to rise, breaking through the 142 mark. However, after the speech of Bank of Japan Governor Kazuo Ueda, the exchange rate of the Japanese yen against the US dollar fell in the short term and is now at 142.94.
The Japanese stock market has seen a slight decline in gains. As of the close, the Nikkei 225 index narrowed its gains to 1.5%, with the highest intraday increase being 2.21%. The Japan Eastern Stock Exchange index narrowed its gains to 0.97%.
Yusuke Matsuo, an economist at Mizuho Securities, said that the trend of the Japanese yen may have become a more important factor in the decision-making process of the Bank of Japan. He pointed out that the recent statement by the Bank of Japan stated that the impact of exchange rate movements on prices is often greater than in the past. It is expected that the Bank of Japan will once again maintain its policy interest rate unchanged at its October meeting to scrutinize trends in financial markets, the United States, and other overseas economies more closely.
Kazuo Ueda speaks out
On September 20th at 2:30 pm Beijing time, the Governor of the Bank of Japan, Kazuo Ueda, issued a strong signal during a press conference after the meeting.
Kazuo Ueda stated that the Japanese economy is experiencing a moderate recovery, despite some signs of weakness. Considering that the current real interest rates are still at an extremely low level, if the economic and price prospects of Japan are realized, the policy interest rates will continue to be raised accordingly, and the degree of policy easing will be adjusted accordingly.
If the economic development meets our expectations, our idea of continuing to raise interest rates has not changed, "said Kazuo Ueda
Kazuo Ueda also emphasized that he will monitor economic and market trends with a high sense of urgency. It is necessary to closely monitor the financial and foreign exchange markets, as well as their impact on the Japanese economy and prices.
Kazuo Ueda stated that due to recent foreign exchange fluctuations, the risk of price increases has decreased, so there is still some time left for monetary policy decisions. The risk of inflation exceeding expectations has weakened to some extent.
Kazuo Ueda pointed out that there is no specific timetable to confirm the time required for the impact of overseas economies on the outlook of the Bank of Japan. We need to closely monitor whether the US economy can achieve a soft landing or face more severe adjustments. The Bank of Japan is currently in a stage of deepening its understanding of neutral interest rates while also paying attention to the impact of interest rate hikes on the economy.
Bloomberg's survey shows that 53% of analysts expect the Bank of Japan to raise interest rates in December. Goldman Sachs and Bank of America Merrill Lynch expect the next interest rate hike to occur in January next year.
Given the unpredictable nature of the financial market, Goldman Sachs believes that there is still uncertainty about the timing of the Bank of Japan's next interest rate hike. If the financial market experiences a sharp decline due to increased concerns about the US economic recession and other factors, Japanese economic activity and price inflation trends may be lower than expected, and the interest rate hike may be delayed. If the economic, wage, and price data continue to perform steadily, and the financial market is generally stable, it is possible to raise interest rates in December this year.
Bank of America Merrill Lynch predicts that the Bank of Japan may raise interest rates again to 0.5% in January 2025 and further to 0.75% in the second half of next year.
Katsutoshi Inadome, a strategist at Sumitomo Mitsui Trust Co., Ltd., predicts that if Japan's consumption and economic growth continue to improve, the Bank of Japan will raise interest rates by 25 basis points later this year.
Japan's inflation accelerates
The inflation situation in Japan is also an important reference for the Bank of Japan's monetary policy choices, which may directly determine the timing of the next interest rate hike.
On September 20th, the National Bureau of Statistics of Japan released the price index for August this year, with inflation accelerating for the fourth consecutive month, far exceeding the 2% inflation target set by the Bank of Japan.
The latest data shows that Japan's CPI in August increased by 3% year-on-year, with an expected value of 3%, higher than the previous value of 2.8%. The core CPI, excluding fresh food, increased by 2.8% compared to the previous year, with an expected value of 2.8%, accelerating from the 2.7% inflation in July, and has remained at or above the target level of 2% for 29 consecutive months.
Overall, the three indicators released by Japan in August were in line with expectations, but they have all increased compared to the previous month, and market expectations for further interest rate hikes by the Bank of Japan still exist. Kazuo Ueda once emphasized that "if the inflation rate continues to steadily reach its 2% target (as currently predicted by the Central Bank Committee) and wages steadily increase, the Bank of Japan is prepared to further raise interest rates.
Among them, due to the greater decrease in resource prices last year than this year, the increase in electricity and urban gas bills in August expanded, while gasoline and kerosene were negative, and the overall increase in energy remained unchanged.
In August, Japan's CPI for fresh food and energy increased by 2% year-on-year, with an expected value of 2%, compared to the previous value of 1.9%.
Marcel Thieliant, head of Asia Pacific at Capital Economics, believes that if Japan's potential inflation rate remains around 2% in the coming months, it will prompt the Bank of Japan to raise interest rates again at its October meeting.
But some analysts also believe that the Federal Reserve has undergone a major shift, and the momentum of the global "interest rate cut wave" is increasing. This means that it will have a greater impact on the exchange rate of the US dollar against the Japanese yen; In this context, the Bank of Japan may become more cautious in raising interest rates this year.