The dollar’s rise to about 157.87 yen suggests traders read the opinions as supportive of more hikes but not of an immediate follow-up, so expectations for an October move have been trimmed. Softer U.S. inflation data and the Cabinet Office’s call for caution both argue against a rapid pace. Elevated oil prices and firm corporate price expectations in the tankan pull the other way. The BOJ’s quarterly growth and inflation forecasts are the next catalyst for that debate.
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Earlier:
- Japan manufacturing PMI slips to 54.1, a six-month low, as new order growth slows
- Japanese firms expect consumer prices to rise 2.6% a year from now, down from 2.7%
- BOJ opinions show members open to faster hikes if inflation risks overshooting 2% target
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The BOJ’s hawks and a strong tankan favour further hikes, but doves, the Cabinet Office and eased yen pressure leave the timing between October and December still open.
Summary:
- The BOJ’s September summary of opinions shows some members saw a need to accelerate rate rises or move the policy rate closer to the goal soon, and most favoured further hikes after September’s rise to 1.25%, a 31-year high.
- One member flagged high crude oil prices amid the Middle East conflict as an inflation risk, and several opinions said underlying inflation is at or near the 2% target.
- Doves Toichiro Asada and Ayano Sato dissented in September, opinions warned of weak consumption and subdued services inflation, and a Cabinet Office representative urged the BOJ to examine the cumulative effects of past hikes.
- The dollar rose to about 157.87 yen after the summary as investors cut bets on a back-to-back October hike, and many analysts expect the next move in October or December.
- The tankan showed large manufacturers at +24, the highest since March 2018 but under the +25 forecast, and large non-manufacturers at +35 against a +36 forecast, the first fall in five quarters.
- Firms forecast inflation of 2.6% in three years and 2.5% in five, and big companies plan to lift capital spending by 11.3% this financial year.
In case you missed it, two Japanese releases this week sharpened the debate over how quickly the Bank of Japan will raise interest rates again after its September increase to 1.25%, a 31-year high. A summary of opinions from the September meeting showed some policymakers saw a need to accelerate the pace of rate rises, or to move the policy rate closer to the central bank’s goal soon, while the quarterly tankan survey showed business confidence at an eight-year high.
Most of the opinions in the summary favoured following September’s hike with further increases as inflationary pressure builds, reinforcing market views of another rise this year. One member said the pace of hikes would need to accelerate if signs of an upward deviation in prices emerged, and another said moving closer to the approximate goal relatively soon would give the bank room to respond to unexpected developments. A further member pointed to the risk that crude oil prices could stay high amid the Middle East conflict, and several opinions said underlying inflation had reached, or was close to reaching, the 2% target. The BOJ is seen as under greater pressure to hike than other central banks because its policy rate remains near the bottom of the estimated 1.1% to 2.5% range for Japan’s nominal neutral rate.
Not everyone agreed. Two doves on the nine-member board, Toichiro Asada and Ayano Sato, dissented from September’s decision, and the summary included opinions, probably theirs, warning of weak consumption and subdued services inflation. A Cabinet Office representative urged the bank to examine the cumulative effects of past hikes and to take neutral-rate estimates into account. Reuters noted that Economy Minister Minoru Kiuchi attended for the Cabinet Office and is seen as an aide to Prime Minister Sanae Takaichi, who is viewed as cautious about hikes that could raise the cost of funding her spending plans. The dollar rose to about 157.87 yen after the summary as investors trimmed bets on a back-to-back hike in October, and many analysts expect the next move in October or December.
The tankan added support for the hawks. The index for large manufacturers rose to +24 from +22 in June, the highest since March 2018, though just under the +25 forecast, while the large non-manufacturers index slipped to +35 from +37, short of the +36 forecast and its first fall in five quarters. Firms forecast inflation of 2.6% in three years and 2.5% in five, and big companies plan to lift capital spending by 11.3% this financial year. Shinichiro Kobayashi of Mitsubishi UFJ Research and Consulting said the results show underlying price pressure remains firm, while Masato Koike of Sompo Institute Plus said the BOJ’s hikes appear to have had limited impact on corporate financing conditions.
The BOJ will weigh the tankan in its quarterly growth and inflation forecasts this month, which should offer clues on timing. Softer than expected U.S. inflation data may also reduce the need to hike quickly to avoid yen falls that raise import costs, which keeps the October versus December question open.
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October 29 and 30 the next meeting:
This article was written by Eamonn Sheridan at investinglive.com.