(Dec 3): Bank of Japan (BOJ) governor Kazuo Ueda has plenty of data to support the case for raising the benchmark rate in December, an outcome that would mark the first tightening of policy three times in a calendar year since the peak of Japan’s asset bubble in 1989.

The governor appears determined to weigh his options until the last minute before the Dec 19 decision. He will sift through forthcoming numbers, including the central bank’s Tankan survey on Dec 13, and monitor the US Federal Reserve’s (Fed) own rate decision due several hours before the BOJ’s board sets policy.

Still, expectations of a near-term move are rising. Ueda reiterated in an interview published Saturday that authorities will raise rates if the economy performs in line with projections, and he went a step further by saying the timing for a hike is “nearing” precisely because forecasts have proved prescient. Inflation momentum has been sustained, businesses are planning to invest and wages are rising.

With annual wage talks also off to a fairly bullish start in an indication that the economy is inching toward a virtuous wage-price cycle, the December policy meeting promises to be very much a live event. Most economists surveyed last month foresaw a hike by January, and Ueda’s weekend interview probably nudged some of those views forward, as two-year government bond yields rose on Monday to the highest since 2008.

“The next rate hike is likely to be in December,” said Ko Nakayama, the chief economist of Okasan Securities and a former BOJ official. “The BOJ has said it will do it if the economy goes along with the official projections. There is mounting evidence to support that.”

The last time the BOJ conducted three hikes in a single year was in 1989. The third increase that year came on Christmas Day just four days before the Nikkei 225 stock average peaked at 38,957.44.

The cumulative scope of those moves, which took the official bank rate to 4.25% from 2.5% at the start of the year, combined with the bank’s warnings about the bubble, weighed heavily on the economy and helped prick the overstretched confidence of investors. The stock market didn’t revisit those heights again until February this year, three and a half decades later.

Ueda faces a very different economic landscape in 2024. Japan is no longer in any kind of potential competition to become the world’s biggest economy. Instead, it is an ageing economy trying to re-establish a cycle of inflation, economic dynamism and growth. After years of policy experimentation, the governor is looking to return the central bank to an orthodox approach of policy control through interest rates.

In his first full year since taking the helm in April 2023, Ueda has already made 2024 a landmark year by ending the bank’s massive monetary easing programme in March with the first rate hike in 17 years.

The next hike would bring the BOJ’s policy rate to 0.5% from 0.25%, the highest level since 2008. While that’s still very low compared with borrowing costs managed by major global peers, the move still represents a substantial change after it stayed at -0.1% for years as the world’s last negative rate.

While Ueda’s surprisingly rapid march towards normality has been smoother than expected, it has had its speed bumps. The BOJ’s second hike in July helped trigger a market meltdown in early August including the Nikkei’s biggest daily fall on record. But markets eventually settled down.

Ueda has vowed to conduct careful communications ahead of the BOJ’s next move. The governor hasn’t gone so far as to adopt the sort of communication style favoured by Fed chair Jerome Powell, who telegraphed a pending rate move by saying “the time has come”.

Ueda’s choice of the word “nearing” allowed him to hint that a move is coming without boxing himself into a precise month.

In the media interview published on Saturday, the governor noted that he is keeping an eye on the wage talks as well as any risks that might emerge from the US economy as authorities attempt to engineer a soft landing at a time of political transition. The robust wage gains achieved this spring were an impetus behind the bank’s decision to begin rolling back its stimulus programme in March.

This month’s decision day could see a narrowing of the difference in US and Japanese interest rates with moves from both sides. As of Monday, traders saw around a 67% chance that the Fed will cut rates, and about a 61% chance that the BOJ will hike, doubling from a month ago.

“If the Fed moves and the BOJ doesn’t, that could shed light on the BOJ’s cautiousness and weaken the yen,” Nakayama said. “That could also be a source of confusion that might destabilise financial markets.”

Some economists say political factors could push the BOJ’s hike decision into January. One reason to pause is Prime Minister Shigeru Ishiba’s weak footing after the ruling coalition lost its majority while sustaining its worst electoral drubbing since 2009 in October.

The prime minister must seek the cooperation of opposition parities to help pass a ¥14 trillion (US$93 billion or RM417.73 billion) extra budget to fund a stimulus package. The government also needs their support to compile a regular budget and undertake law revisions.

“Ishiba is walking a tight rope with his ruling coalition not having a majority in parliament,” BNP Paribas economists Ryutaro Kono and Hiroshi Shiraishi wrote in a report on Monday. “The BOJ may decide to wait if Ishiba’s government can’t have proper communications” while also balancing other tasks.

Still, if Ueda didn’t think there was a good chance of hiking in December, he probably wouldn’t have accepted the interview request, according to Naomi Muguruma, a long-time BOJ watcher. The governor only does about two major interviews with the press per year, so the timing of last weekend’s story may be pertinent.

“If the BOJ was thinking about a January rate hike, there was no need to have the interview now and indicate a rate hike,” Muguruma, the chief fixed-income strategist of Mitsubishi UFJ Morgan Stanley Securities Co, wrote in a note. “The BOJ is laying the groundwork for an additional hike at the December meeting.”

Source: Theedgemarkets

The pace of South Korea’s consumer inflation picked up less than expected and stayed below the central bank’s target for a third month, in a sign of price stability.

Consumer prices advanced 1.5 per cent in November from a year earlier, accelerating from a 1.3 per cent clip in October, the statistics office reported Tuesday. Economists surveyed by Bloomberg had forecast the pace of price growth would rise to 1.7 per cent.

The latest data came after the Bank of Korea conducted back-to-back interest-rate cuts in the last two months, as authorities quickly adjusted the focus of policy to safeguard economic momentum.

Policymakers are concerned economic growth may be sputtering after gross domestic product grew less than expected in the third quarter. Donald Trump’s return to the White House next month may create headwinds for the trade-reliant South Korean economy in the form of tariffs and other measures.

“A strong dollar as a result of trade tensions could impact South Korea’s currency and, subsequently, inflation next year,” said KB Securities economist Gweon Heejin, who expects the BOK to cut its rate twice in the first half of 2025.

The BOK sees the economy slowing to a growth pace of 1.9 per cent in 2025 from 2.2 per cent in 2024, suggesting a moderation of export momentum. At last week’s board meeting, BOK officials also cut the inflation outlook for next year to 1.9 per cent, a revision of 20 basis points from their August view.

Economists see weak private spending, a cooling export rally and lingering credit risks in construction as factors that may spur the BOK to accelerate its easing campaign in 2025. How global central banks like the Federal Reserve manoeuvre their own policies in the coming months will also influence BOK decisions.

Consumer prices rose sharply after the government undertook stimulus to shore up growth during the coronavirus pandemic. Many central banks are now feeling confident enough to loosen their restrictive policies after their rate hikes helped tame inflationary pressure.

The latest figure has been partly skewed by a lower base last year when the growth in consumer prices slew by 50 basis points to 3.3 per cent from a prior month. A reduction in fuel-tax cuts might have affected the reading as well in November.

Consumer prices excluding energy and food rose 1.9 per cent from a year earlier in November, which indicates underlying inflationary pressure remains largely under control even as it picked up a tad from 1.8 per cent in October.

A cost-of-living index increased 1.6 per cent from a year earlier, accelerating from 1.2 per cent in the prior month, according to Statistics Korea. A separate price index for fresh foods edged up 0.4 per cent in November, compared with 1.6 per cent growth in October, the data showed. Utility costs associated with electricity, gas and water rose 3 per cent, maintaining the same pace for three months in a row.

Source: Straitstimes