Japan's Ministry of Finance plans to raise its assumed long-term interest rate to 1.5% for the fiscal year 2024/25, up from the current record-low of 1.1%, indicating a potential strain on the country's budget as it is set to exceed 114 trillion yen ($782.64 billion).
Experts are divided on whether the US Federal Reserve should raise its interest rate target to 3% to combat inflation and cushion against recessions, with some arguing that raising inflation targets would be futile.
Japan is unlikely to intervene in the market unless the yen weakens past 150 to the dollar and becomes a major political issue, according to a former central bank official, who also noted that the benefits of a weak yen are becoming clearer due to the re-opening of Japan's borders.
Consumer inflation in Tokyo grew at a slower pace than expected in August, but the core figure, which excludes fresh food and energy costs, remained at its highest level in over 40 years, indicating that inflationary conditions in Japan remain high and putting pressure on the Bank of Japan to eventually tighten policy.
As Jerome Powell, the chair of the U.S Federal Reserve, prepares to speak at the Jackson Hole symposium, the big question is whether he will signal a major shift in how central banks deal with inflation, particularly regarding interest rates and inflation targets. Some economists are suggesting moving the inflation target range from 2-3 percent, while others argue for higher targets to give central banks more flexibility in combating recession. The debate highlights the challenges of setting and changing formal inflation targets and the ongoing changes in the factors that drive growth and inflation.
Financial expert Izuru Kato warns that a delay in the Bank of Japan's monetary policy normalization could result in steep interest rate increases and highlights the bank's concerns over inflation stabilization, government debts, and housing loans.
The spike in retail inflation has raised uncertainty for investors and savers, with expectations of interest rate cuts being pushed to the next fiscal year and the possibility of a rate hike. The Reserve Bank of India projects inflation to stay above 5% until the first quarter of 2024-25, and food price pressures are expected to persist. While inflation may impact stock market returns, gold and bank deposit rates are expected to remain steady.
Bank of Japan Governor Kazuo Ueda stated that underlying inflation in Japan remains below the bank's 2% target, leading to the decision to maintain the current approach to monetary policy, despite core consumer inflation staying above the target for the 16th consecutive month.
India's inflation must be brought within the central bank's tolerance band before the war on inflation can be relaxed, according to a member of the monetary policy committee, who also expects inflation to resume its downward trajectory in the next quarter.
The Federal Reserve's preferred inflation gauge increased slightly in July, suggesting that the fight against inflation may be challenging, but the absence of worse news indicates that officials are likely to maintain interest rates.
Pakistan's inflation rate remained above target in August at 27.4%, driven by reforms linked to an IMF loan that have fueled price pressures and declines in the rupee currency.
Former Bank of Japan board member Goushi Kataoka believes that the central bank can only shift away from its easy monetary policy once it has achieved its 2% inflation target sustainably, with wage negotiations in 2024 playing a key role in this process. Kataoka expects the Bank of Japan to gradually remove its yield curve control and negative interest rate policies before exiting its easy policy. He also emphasizes the importance of cooperation between the Japanese government and central bank in achieving the inflation target.
The Bank of Japan has signaled a possible early end to its easy money stance, with the central bank considering interest rate hikes and an early end to its bond-buying policy, which caught markets off guard and caused the yen to surge and Japanese government bond yields to reach a 9-year high.
The Wall Street Journal reports a notable shift in the stance of Federal Reserve officials regarding interest rates, with some officials now seeing risks as more balanced due to easing inflation and a less overheated labor market, which could impact the timing of future rate hikes. In other news, consumer credit growth slows in July, China and Japan reduce holdings of U.S. Treasury securities to record lows, and Russia's annual inflation rate reached 5.2% in August 2023.
Japanese long-term interest rates and the yen rose after Bank of Japan Governor Kazuo Ueda hinted at the possibility of ending the bank's negative interest rate policy.
The Bank of Japan's potential shift away from negative interest rate policy has ignited the Japanese Government Bond and currency markets, with the yen seeing its biggest rise in two months and the 10-year JGB yield reaching its highest point in almost a decade.
The dollar remains steady ahead of a key U.S. inflation report, but rises against the yen as traders digest comments from Japan's central banker on a possible early exit from negative interest rates.
Inflation is expected to fall below the Federal Reserve's 2% target by late next year, despite a recent rise in consumer prices driven by increased energy costs.
The Federal Reserve faces a critical decision at the end of the year that could determine whether the US economy suffers or inflation exceeds target levels, according to economist Mohamed El-Erian. He suggests the central bank must choose between tolerating inflation at 3% or higher, or risking a downturn in the economy.
Speculation is growing that the Bank of Japan may be moving away from ultra-loose policy and negative interest rates, with its policy meeting being the highlight of the week in Asian markets.
The Bank of Japan is expected to maintain ultra-low interest rates and reassure markets that monetary stimulus will continue amidst China's economic struggles and the global impact of US interest rates.
The Bank of Japan (BOJ) may become the most significant uncertainty factor in global markets as it potentially unwinds its negative interest rate policy and yield curve control, which could have knock-on effects on risk assets, including cryptocurrencies.
Central banks around the world may have reached the peak of interest rate hikes in their effort to control inflation, as data suggests that major economies have turned a corner on price rises and core inflation is declining in the US, UK, and EU. However, central banks remain cautious and warn that rates may need to remain high for a longer duration, and that oil price rallies could lead to another spike in inflation. Overall, economists believe that the global monetary policy tightening cycle is nearing its end, with many central banks expected to cut interest rates in the coming year.
Asia-Pacific markets fell as the Bank of Japan kept rates unchanged and noted a "moderate recovery" in the economy, while Japan's private sector activity expanded at its slowest pace since February and the country's August inflation rate remained above the BOJ's target for the 17th straight month.
Japan's core inflation remained steady in August, staying above the central bank's 2% target for the 17th consecutive month, signaling broadening price pressure and potentially increasing the case for an exit from ultra-easy monetary policy.
If the Japanese yen weakens beyond 150 to the dollar, the Bank of Japan could be forced to hike rates sooner than expected, which may lead to the unwinding of the yen carry trade and a return of Japanese capital to domestic bond markets, potentially triggering market volatility.
Japanese consumer inflation grew above expectations in August, potentially signaling a move away from negative interest rates as the Bank of Japan meets to discuss its monetary policy.
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