Sheikh Hasina’s Departure Exposes The Fractures in Bangladesh’s Politics

Political

Economic

Summary:

The interim government must build political consensus to stabilise the economy and improve security. Other countries in the region should take note.

The resignation of Prime Minister Sheikh Hasina after anti-government protests has been celebrated by many in Bangladesh as a ‘second liberation’. Yet the ousting of the world’s longest-serving female leader also marks the most critical political situation in the country since the revolution in 1971. The turmoil reflects underlying fissures in Bangladesh’s politics, economy and security situation.

To address these issues, the military-led interim government will need to focus on building political consensus, stabilising the economy and rebuilding the legislative, judicial and executive state institutions to ensure accountability.

Economic challenges

The anti-government demonstrations that toppled Hasina began as protests against the reimposition of public sector job quotas, reflecting the challenges facing the Bangladeshi economy. Bangladesh has been touted for its strong economic credentials in recent years, with its per capita GDP, life expectancy and female workforce participation rate all surpassing that of neighbouring India, and its fast-growing economy, with growth averaging 6.6 per cent in the decade preceding the COVID-19 pandemic.

However, these statistics belie structural challenges facing the Bangladeshi economy. These include high inflation – 9.73 per cent in 2023-24, the highest since 2011-12 – and slowing growth amid the country’s export-dependent economy. The country’s readymade garment industry accounts for 83 per cent of the country’s total export earnings, which makes it highly vulnerable to external shocks – from the COVID-19 pandemic to the war in Ukraine.

The country faces high levels of youth unemployment… This is what made the issue of public sector job quotas a lightning rod for anti-government unrest.

The protests in July saw many factories shut and exporters fear mounting losses if domestic political disruptions and lootings of factories continue. However, the IMF affirmed its commitment to the interim government following the protests, and will proceed with its planned $4.7 billion loan to promote economic stability.

Most significantly, the country faces high levels of youth unemployment with 18 million people – almost a fifth of the population of 170 million people – not working or in education. This is what made the issue of public sector job quotas a lightning rod for anti-government unrest, with 400,000 new graduates competing for 3,000 civil service jobs. The protests also raise questions about Bangladesh’s stability as an investment destination, particularly for the country’s lucrative textile and garment industries.

Bangladesh is on course to graduate from Least Developed Country status (as defined by the UN) in 2026, a transition which will require a revised set of trade agreements with major trading partners. Yet the European Union postponed the negotiations on a new cooperation agreement because of the government’s response to the July protests.

This pause includes discussions on the EU’s Generalised Scheme of Preferences Plus (GSP+) trade scheme, which gives developing countries a special incentive to pursue sustainable development and good governance. The interim government will need to resume these talks to ensure continued preferential access to the EU market – the main destination for ready-made garment sector.

Regional and global implications

Developments in Bangladesh also hold lessons for other countries in South Asia with large and young populations facing growing inequality and lack of employment opportunities. With almost 40 per cent of the region’s population below the age of 18 there is a latent risk of their demographic dividend becoming a demographic burden in the absence of sufficient economic opportunities and employment generation.

The departure of Sheikh Hasina marks a new chapter in the country’s political development, with the interim-government facing major challenges. In the short-term, it needs to stabilise the political situation and then to prepare for a new election. It also needs to start engaging internationally to gain legitimacy and rebuild partnerships with its neighbours and trading partners.

But any new government must also look further ahead and address the country’s myriad structural challenges. It must prioritise security for its citizens and protect the country’s economic development, but both require a period of stability within its splintered politics.

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Alex

Economic

Central Bank

A sharp slowdown in the U.S. job market that touched off days of global stock-market turmoil also fueled speculation the Federal Reserve may not wait until its next scheduled meeting, in September, to cut interest rates.

Indeed, an interest rate futures contract expiring later this month that tracks Fed policy expectations shot to a two-month high earlier in the week in a bet that rates would be lower by the end of August.

The odds are against it. As Chicago Fed President Austan Goolsbee said earlier this week, "the law doesn't say anything about the stock market. It's about employment and it's about price stability," referring to the Fed's double mandate to foster full employment and price stability.

An increasing number of analysts are now penciling in a half-a-percentage-point rate cut for the Fed's September meeting. But few if any believe the Fed will move sooner.

"Current economic data do not warrant an emergency intermeeting rate cut, and this would only ignite a new round of panic into the markets," wrote Nationwide economist Kathy Bostjancic.

Even former New York Fed President Bill Dudley, who called for the U.S. central bank to cut rates last week even before the latest data showed the unemployment rate jumped to 4.3% in July, wrote this week that an intermeeting cut is "very unlikely."

In the days since the rout began, global stock markets - which had also been pummeled by worries about Bank of Japan tightening and an unwinding of yen-funded trades - have somewhat recovered. A report Thursday showing fewer Americans filing unemployment insurance claims added to a sense of relief in U.S. markets.

Traders of short-term U.S. interest-rate futures have for now not only all but abandoned bets on an intermeeting Fed move but have also pared expectations on the size of the first rate reduction. What had been seen as a nine-to-one chance of a half-point rate cut in September is now down to about even odds as against a quarter-point cut, rate-futures prices show.

In late August Fed Chair Jerome Powell is expected to have a chance to give a fresh steer on what he thinks could be needed when global central bankers gather at the Kansas City Fed's annual economic symposium in Jackson Hole, Wyoming.

For now Powell is widely anticipated to look past the stock-market swoon and stick to what he said last Wednesday, after the Fed's decision to leave the policy rate in the 5.25%-5.50% range.

"If we do get the data that we hope we get, then a reduction in our policy rate could be on the table at the September meeting," he said.

In the weeks ahead, data on jobs, inflation, consumer spending and economic growth could all influence whether that reduction would be a quarter-point cut or something bigger.

On each of the eight occasions over the past 30 years that the U.S. central bank has cut rates between policy-setting meetings, the upheaval in markets went well beyond equities. In particular, bond market indications of rapidly building disruptions to the credit flows that keep businesses humming were in plain view, a factor notably absent so far.

A spin through each of them shows why those times were different.

Russian Financial Crisis/LTCM - 25 basis points

Oct. 15, 1998 - The Fed, which had only just delivered a quarter-point rate cut at its meeting two weeks earlier, cut the policy rate another 25 basis points. The failure of hedge fund Long-Term Capital Management - on the heels of Russia's sovereign debt default two months earlier - was reverberating through U.S. financial markets, blowing out credit spreads that threatened to impact investment and drag down the economy.

Technology Stock Swoon - 100 basis points

Jan. 3 and April 18, 2001 - The Fed delivered two surprise half-point interest rate cuts early in the year after the sharp upswing in dot-com tech stocks turned into an equity rout that policymakers worried would pinch household and business spending. What had been mostly a stock market event bled into the corporate bond market through late 2000, sending high-yield credit spreads to their widest on record to that point.

The two Fed cuts were in addition to two half-point cuts at its Jan. 31 and March 20 meetings.

Sept 11 Attacks - 50 basis points

Sept. 17, 2001 - The Fed cut the policy rate by half a percentage point following the attacks and the days-long closure of U.S. financial markets, and promised to continue to supply unusually large volumes of liquidity to the financial markets until more normal market functioning was restored. High-yield bond spreads widened more than 200 basis points before the Fed's actions helped restore calm in credit markets.

Global Financial Crisis - 125 basis points

Jan. 22 and Oct. 8, 2008 - The Fed cut its policy rate by 75 basis points at an unscheduled meeting in January as what had begun as a crisis in subprime lending the prior summer gathered steam and spread to global markets. High-yield spreads stood at their widest in five years at the time.

Then, Lehman Brothers' failure on Sept. 15 ushered in a new phase of the crisis, and though the Fed skipped policy action at its meeting a day later, by early October it got together with other global central bankers for a coordinated action that included a half-point cut to the federal funds rate. Credit spreads eventually peaked near year end at what is still a record for both high-yield and investment-grade bonds.

COVID-19 Pandemic - 150 basis points

March 3 and March 15, 2020 - The Fed cut rates by half a percentage point, and then less than two weeks later by another full point, to ease policy as global travel and commerce suddenly skidded to a near standstill in the face of government shutdowns to prevent the spread of COVID-19. While U.S. stock indexes dropped more than 30%, of even greater concern was a 700-point widening of credit spreads and disruptions to the function of the U.S. Treasury market.

Source: Reuters

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JanusHenderson

Bond

Economic

While equity investors might look to a valuation metric such as the price-to-earnings ratio to determine if stocks look cheap or expensive, bond investors typically pay attention to credit spreads. (Credit spread is the additional yield – or income – that a bond pays an investor above the risk-free U.S. Treasury rate to compensate for the additional credit, or default, risk.)

Spread levels are of particular importance to active managers because active managers seek to maximize the overall yield – and by implication, the spread – of a portfolio in relation to the risk it takes to earn that yield.

The basics of interest rate risk and return

Before diving into credit spread analysis, it is important to first understand the basic workings of the U.S. Treasury yield curve.

Exhibit 1 shows two Treasury yield curves at two points in time. The curve visually represents the yields an investor can earn from U.S. Treasury bonds of various maturities. The curve can either be upward sloping, meaning longer-maturity bonds pay higher yields (tangerine line), or it can be inverted, meaning shorter-maturity bonds pay higher yields (blue line).

Not only does the current shape of the yield curve matter, but anticipated changes to the curve due to changes in interest rates are a key consideration for investors.

Shifts in the curve can either be parallel or nonparallel. Parallel shifts entail the entire curve moving up or down in equal proportion. Nonparallel shifts result when bonds of differing maturities move to a greater degree than others, causing a change to both the overall position and slope of the curve.

These shifts have a meaningful impact on the prices of bonds at each maturity, both on an absolute basis and relative to one another. (Rising rates result in falling bond prices, and vice versa. Long-term bonds are more sensitive to changes in interest rates than shorter-dated bonds, all else equal.)

Active portfolio managers typically dedicate significant time and attention to managing yield curve exposure to maximize the yield earned, while also seeking to best position portfolios to profit from anticipated changes to the curve. U.S. Corporate Credit: Are Valuations Cheaper Than They Look?_1

U.S. Corporate Credit: Are Valuations Cheaper Than They Look?_1

Degrees of credit spread analysis

Most fixed income investors invest not only in government bonds – which are considered risk-free assets and contain a negligible amount of credit risk – but also in bonds that contain additional credit risk, such as corporate bonds. Investors are compensated for the supplementary risk by the credit spread.

Typically, as credit risk increases, credit spread increases. As shown in Exhibit 2, BBB rated bonds yield more than A bonds, while A bonds yield more than AA bonds, and so on. Overall spread levels broadly rise and fall on factors such as changes in the macroeconomic environment, strengthening or weakening in corporate fundamentals, and changes in the supply and demand dynamics of the bond market.

Active managers will closely monitor these and other factors in relation to spread levels to determine how to best position their portfolios. U.S. Corporate Credit: Are Valuations Cheaper Than They Look?_2

U.S. Corporate Credit: Are Valuations Cheaper Than They Look?_2

While spreads can rise and fall in aggregate, they can also fluctuate relative to one another. For example, BBB spreads widened much more than A or AA spreads in February 2016, a reflection that elevated default risk would affect lower-rated bonds to a greater degree due to a collapse in the oil price. At other times, the gap in spreads can narrow significantly on the back of strong economic growth, such as in early 2021.

It is up to the active manager to decide whether the move in spreads appropriately reflects the change in risk. Further, the difference in spreads takes place not only between different ratings buckets, but also on an industry, sector, subsector, and idiosyncratic (individual issuer) level.

Are spreads comparable over time?

While the option-adjusted spreads (OAS) in Exhibit 2 illustrate how spreads fluctuate over time, they do not consider how the nature of the Bloomberg U.S. Corporate Bond Index may have changed during that period. For example, between January 2013 and July 2024, the duration of the Bloomberg U.S. Corporate Bond Index fluctuated between a low of 6.5 years and a high of 8.8 years. Taking into account that bond spreads are impacted by duration, we believe investors should adjust for these changes.

In addition to duration, we believe variations in other factors such as credit ratings, industry composition, and average bond prices should also be accounted for. Janus Henderson has developed a proprietary model that adjusts for these differences, which we believe allows us to compare spreads more accurately over time.

Exhibit 3 shows the Bloomberg U.S. Corporate Bond Index OAS versus the Janus Henderson Adjusted U.S. Corporate OAS. During certain periods there has been no material difference, but at other times the difference has been significant.

This is particularly important in the current environment, where adjusted spreads are over 12 basis points (bps) wider than the OAS of the index.1 This represents a 10% valuation differential and implies spreads are trading cheaper than they first appear (around the 44th percentile of their historical range versus the 33rd percentile). U.S. Corporate Credit: Are Valuations Cheaper Than They Look?_3

U.S. Corporate Credit: Are Valuations Cheaper Than They Look?_3

Takeaways for investors

After adjusting for changes to the index, we believe corporate valuations do not look as rich as they might otherwise. And when considering the state of the economy, a dovish Federal Reserve, and strong corporate balance sheets, we think corporate spreads appear to be appropriately priced. Similarly, we believe market technicals and fundamentals support the current level of spreads.

Investors are faced with many moving variables when managing bond portfolios. While our analysis has focused solely on the U.S. corporate investment-grade bond market, we apply the same principles of deep quantitative and qualitative analysis to all sectors of the fixed income market.

When constructing multi-sector portfolios that include corporate, securitized, government, and global fixed income assets, we believe investors should look to active managers with a proven record of executing a research-driven approach.

To stay updated on all economic events of today, please check out our Economic calendar

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FastBull Featured

Political

Daily News

Central Bank

Economic

[Quick Facts]

1. Fed's Schmid says we are not quite there in cooling inflation.

2. Israel's security cabinet meets to discuss how to respond to attacks by Iran and Hezbollah.

3. Fed's Goolsbee says more data is needed to assess the labor market.

4. U.S. initial jobless claims decline by the most in nearly a year.

5. Wall Street sees the end of the Fed's balance-sheet runoff this year.

[News Details]

Fed's Schmid says we are not quite there in cooling inflation

Federal Reserve Bank of Kansas City President Jeffrey Schmid said on Thursday (ET) that the recent decline in inflation is "encouraging" and more reports of low price pressures will increase his confidence that inflation is returning to the central bank's 2% target and will therefore be able to lower interest rates.

The U.S. economy is resilient and consumer demand is strong. The labor market still looks healthy. The July nonfarm payrolls report has many questioning that resilience, but it is important to note that many other indicators point to continued strength. Taking all of this into account, the Fed's current policy stance is "not as tight" as it could be.

"Given the multi-decade shock to inflation that we have experienced, we should be looking for the worst in the data rather than the best," Schmid said, noting that prices can be volatile in the U.S. and the Fed needs "longer periods" to be sure of inflation's path. For inflation to come down further, the labor market needs to cool further.

Israel's security cabinet meets to discuss how to respond to attacks by Iran and Hezbollah

The Israeli Security Cabinet met on the evening of August 8 in the Israel Defense Forces' (IDF) underground command room at the military headquarters in Tel Aviv to discuss how to respond to possible attacks by Iran and Hezbollah.

The Israeli Security Cabinet gave the army complete freedom to act and ordered it to prepare for a pre-emptive strike before Iran or Hezbollah responded, according to Israeli Channel 12.

The IDF has prepared a major response operation that may target more than just Lebanon. Response scenarios include rocket fire and incursions by land and sea. In this way, the report added, Israel hopes to send a message that it is prepared for the possibility of the conflict escalating into all-out war.

Fed's Goolsbee says more data is needed to assess the labor market

Chicago Fed President Austan Goolsbee said on Thursday that the job market is cooling down, but the key question is whether it will stabilize at what we used to consider full employment, or if it will continue to deteriorate. In my view, this isn't something that can be answered with just one month of data. We need to look beyond the non-farm payroll numbers and consider trends over multiple months.

U.S. initial jobless claims decline by the most in nearly a year

U.S. initial jobless claims for the week ended August 3 came in at 233,000, down by 17,000 from the previous week. Fewer claims were filed in states such as Michigan and Texas, which have seen large increases in recent weeks. Last week's weaker-than-expected nonfarm payrolls report led to a global market sell-off and sparked calls for the Federal Reserve to start cutting interest rates even before its September meeting. This sharp decline in initial jobless claims, the largest in nearly a year, may help reassure markets that the workforce is simply reverting to its pre-pandemic trend rather than rapidly deteriorating.

Wall Street sees the end of the Fed's balance-sheet runoff this year

The Fed's balance sheet reduction might be nearing its end, but the exact timing will depend on the pace of rate cuts and pressures in the financing markets. Policymakers have indicated that the reduction of U.S. Treasury holdings will be completed by year-end, but many on Wall Street believe that quantitative tightening is unlikely to end abruptly. Recent weak economic data and liquidity pressure risks have added uncertainty to the outlook.

"If the Fed aims to stimulate the economy, it might stop reducing its balance sheet," Bank of America strategists Mark Cabana and Katie Craig wrote in a client report on Wednesday. "But if its goal is to normalize monetary policy, the balance sheet reduction could continue." Signs are growing that the economy is slowing down faster than expected just a few weeks ago, which led to a sharp rally in global bonds on Monday as traders bet the Fed and other central banks will become more aggressive with rate cuts.

Morgan Stanley analysts wrote, "Two possible drivers could lead the Fed to end the balance sheet reduction early: a liquidity drain in the money market or a U.S. economic recession. However, we believe both scenarios are unlikely."

[Today's Focus]

None

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Kevin Du

Energy

Oil prices have retreated in recent weeks as traders look past the current depletion in global inventories to focus on the future threat posed by a possible slowdown in the major economies.

Commercial stocks of crude and refined products in the advanced economies belonging to the Organization for Economic Cooperation and Development (OECD) amounted to 2,761 million barrels at the end of June.

Stocks were 120 million barrels (-4% or -0.71 standard deviations) below the ten-year seasonal average and the deficit had widened from 74 million (-3% or -0.47 standard deviations) at the end of March.

The deficit was the widest for almost two years since September 2022, according to data from the Short-Term Energy Outlook prepared by the U.S. Energy Information Administration (EIA).

Front-month Brent futures prices and the six-month calendar spread both weakened slightly over the second quarter, but were still above the long-term inflation adjusted average, consistent with a gradually tightening market.

Continued Third Quarter Depletion

Since the end of June, U.S. commercial crude inventories, the most frequently and rapidly reported stocks in global markets, have continued to decline further and faster than usual, adding to evidence of a tightening market.

U.S. crude inventories declined in each of the five weeks since the end of June by a total of 19 million barrels, according to the EIA's Weekly Petroleum Status Report.

U.S. crude inventories typically decline over July and August as refineries ramp up processing to meet elevated demand for gasoline during the summer vacation period.

But the seasonal depletion this year was the largest since 2019, and among the largest in the last decade, indicating that global supplies likely continued to tighten at the start of the third quarter.

U.S. crude inventories were 11 million barrels (-3% or -0.23 standard deviations) below the ten-year average on August 2 and the deficit had widened from 4 million (-1% or -0.08 standard deviations) at the end of June.

Most of the depletion occurred at refineries and tank farms in Texas and Louisiana along the Gulf of Mexico, the most closely integrated with global oil markets.

Crude inventories on the Gulf Coast declined in each of the five weeks since the end of June by a total of 19 million barrels, compared with an average depletion of 6 million over the previous decade.

Regional stocks were still 5 million barrels (+2% or +0.17 standard deviations) above the 10-year average on Aug. 2 but the surplus had narrowed from 18 million (+8% or +0.59 standard deviations) five weeks previously.

Deteriorating Economic Outlook

Notwithstanding the inventory depletion, hedge funds and other money managers have become increasingly bearish about the outlook for petroleum prices.

Fund managers cut their combined position in the six most important petroleum futures and options contracts to just 262 million barrels (4th percentile for all weeks since 2013) on July 30.

The combined position had been reduced from 524 million barrels (40th percentile) at the end of June and 616 million (58th percentile) at the end of March.

One reason is that portfolio investors have reacted negatively to plans by OPEC⁺ to unwind some of the group's production cuts from the start of the fourth quarter.

But the primary concern seems to be the deteriorating outlook for the global economy and petroleum consumption.

Purchasing managers surveys and freight data have shown the first-quarter rebound in manufacturing ran out of momentum in the second and third quarters.

From mid-July and especially the start of August concerns about the outlook have become more pronounced, causing oil prices to slump to the lowest level since the start of the year.

Front-month Brent prices have averaged $77 per barrel so far in August, putting them in only the 40th percentile for all months since the turn of the century, after allowing for inflation.

Current prices and positions are consistent with a broad economic deceleration, a mid-cycle slowdown if not a full-blown recession, dampening petroleum consumption and halting or reversing the depletion of inventories.

If the slowdown fails to materialise, however, and depletion continues, prices are primed for a rebound - with the rally anticipated, accelerated and amplified by fund managers rebuilding their positions.

Lower prices are already curbing output growth from U.S. shale producers and will amplify the price rebound, as well as OPEC's ability to unwind some production cuts - but only if the economy avoids a slowdown.

Source: Reuters

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Samantha Luan

Stocks

Data Interpretation

NASDAQ Index, SP500, Dow Jones Forecasts – Stocks Rally After Jobs Data_1

SP500 rallied as traders reacted to the better-than-expected Initial Jobless Claims report. The report indicated that 233,000 Americans filed for unemployment benefits in a week, compared to analyst forecast of 240,000. The previous reading was revised from 249,000 to 250,000. It’s been a while since Initial Jobless Claims report has last served as a major catalyst for the market.

In this case, traders rushed to buy stocks because the report showed that the situation in the job market remained under control. The recent panic was triggered by the weak Unemployment Rate report. Traders feared that the economy was under strong pressure. However, the Initial Jobless Claims report showed that there was no slowdown, so markets are moving towards the levels that were seen before the Unemployment Rate and Non Farm Payrolls reports.

Currently, SP500 is trying to settle above the resistance at 5310 – 5325. In case this attempt is successful, it will move towards the next resistance level at 5400 – 5420. NASDAQ Index, SP500, Dow Jones Forecasts – Stocks Rally After Jobs Data_2

NASDAQ Index, SP500, Dow Jones Forecasts – Stocks Rally After Jobs Data_2

NASDAQ rallied as demand for tech stocks increased after the release of the encouraging job market data. Chip stocks like NVIDIA, Intel, and Advanced Micro Devices are among the biggest gainers in the NASDAQ index today.

In case NASDAQ manages to settle above the resistance at 18,500 – 18,600, it will move towards the next resistance at 19,500 – 19,600. NASDAQ Index, SP500, Dow Jones Forecasts – Stocks Rally After Jobs Data_3

NASDAQ Index, SP500, Dow Jones Forecasts – Stocks Rally After Jobs Data_3

Dow Jones moved towards the 39,500 level amid broad rally in the equity markets. Intel was the biggest gainer in the Dow Jones index today. The stock has finally started to rebound after the major sell-off, which was triggered by the disappointing earnings report.

From the technical point of view, Dow Jones is moving towards the nearest resistance level, which is located in the 39,700 – 39,800 range. RSI is in the moderate territory, so there is plenty of room to gain additional upside momentum in the near term.

Source:FXEMPIRE

Risk Warnings and Disclaimers

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Thomas

Economic

Central Bank

The Bank of Japan managed to calm investor nerves during global market turmoil this week by reversing a calibrated strategy to communicate steady interest-rate rises, but the flip-flop tests the bank's resolve to phase out decades of radical stimulus.

If the central bank, scarred by missteps and reversals going back a quarter century, is at the mercy of markets, it may be constrained in moving away from what it has called excessive support for the world's fourth-biggest economy.

The yen spiked and Tokyo shares plummeted last week as the BOJ unexpectedly raised its policy rate from essentially zero to the highest in 15 years and Governor Kazuo Ueda signalled further steady rate hikes, a path the central bank had been trying to suggest for months.

Ueda's influential deputy helped stabilise sentiment on Wednesday by saying the BOJ would not raise rates when markets were unstable, but confusion resumed on Thursday, when a summary of the discussion at the bank's July 30-31 meeting showed policymakers focussed on a series of rate hikes to keep inflation from overshooting.

"The BOJ hiked interest rates because it didn't like the weak yen. Now it appears to be suggesting a pause in rate hikes because it doesn't like stocks falling," said Takuya Kanda, an analyst at Gaitame.com Research Institute. "If the BOJ is watching markets so much in setting policy, there's a chance it won't be able to raise rates that much."

The Japanese currency skyrocketed on Monday and the Nikkei stock average plunged the most since 1987 after the BOJ raised its short-term policy target to 0.25% from a zero-to-0.1% range, followed by Ueda's hawkish comments. Investors were also rattled by signs the Federal Reserve would soon cut rates to buoy a slowing U.S. economy.

BOJ Deputy Governor Shinichi Uchida said on Wednesday the rout was cause for pause, as it might affect the bank's inflation projections and rate trajectory.

"As we're seeing sharp volatility in domestic and overseas financial markets, it's necessary to maintain current levels of monetary easing for the time being," he said, adding that Japan could afford to wait on hikes as inflation remained moderate.

While steadying markets, Uchida's about-face "also ended up magnifying market swings", said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute. "It's undesirable for BOJ communication to cause so much volatility." BOJ's Communication About-Face May Haunt Future Rate Moves_1

BOJ's Communication About-Face May Haunt Future Rate Moves_1

Deja Vu

Now, said economist Yoshimasa Maruyama at SMBC Nikko Securities, "the chance of a near-term rate hike is gone. In fact, the chance of another hike this year has diminished significantly."

The central bank did not respond to a request for comment on Thursday to criticisms that it is responding to market moves rather than data in setting policy. Uchida on Wednesday insisted the BOJ was focussed on the economy.

"If the market volatility changes our projection, risks and view on the likelihood of hitting our price target, then market moves would affect our decision," Uchida told a press conference after addressing business leaders. "Obviously, our goal is to achieve price stability and through that, healthy economic development. We'll pay heed to economic developments in setting policy."

Japan's ruling and major opposition parties have agreed to summon Ueda to a special parliament session this month to explain the rate hike.

In a rare public chiding, ruling Liberal Democratic Party executive and former finance ministry official Satsuki Katayama urged the BOJ on Wednesday to communicate better with markets, saying the LDP will likely discuss whether the July hike was a mistake.

The BOJ has been here before.

It raised rates from zero in August 2000, ending a then-novel experiment despite government objections. Ueda, then a policy board member, voted against ending zero rates.

Next, the U.S. tech bubble burst, hitting Japan's export-reliant economy. Eight months later the BOJ reversed course, rolling out a new experiment, quantitative easing: flooding the market with yen to support the economy and fight deflation.

By February 2007 it had raised rates to 0.5% when the global financial crisis pushed Japan into recession and forced the bank to cut rates back near zero.

In both cases, the BOJ drew fierce political criticism for phasing out stimulus too hastily.

'Preoccupied' With Anger Over Yen

This time few politicians are demanding the BOJ loosen monetary policy. Days before the July hike, Prime Minister Fumio Kishida said the BOJ's policy normalisation would support economic revitalisation.

Shigeru Ishiba, a leading candidate seeking to replace Kishida in a September LDP leadership election, told Reuters he welcomed the BOJ's plan to gradually raise interest rates.

Politicians, who had long pressured the BOJ to ease policy to weaken a soaring yen to help exporters, have switched in the past two years as the currency's falls 38-year lows threatened to push inflation above the bank's 2% target.

The BOJ may pay a price if its hawkish turn is seen as succumbing to government pressure, some analysts say.

"Recent data all pointed to a weak economy, so it didn't make logical sense for the BOJ to turn so hawkish on the future rate hike path," said former BOJ official Nobuyasu Atago. "Its communication with markets could have been better."

Complicating the BOJ's task, it would be raising rates just as the Fed likely starts cutting, potentially heightening volatility in the dollar/yen exchange rate and hurting Japanese business sentiment.

The BOJ has historically avoided moving in the opposition direction to the Fed for fear of hurting exports and causing disorderly market moves, said former BOJ board member Takahide Kiuchi.

"This time, the BOJ may have been too preoccupied with public and political anger over excessive yen falls," he said. "The very timing of the BOJ's exit makes it extremely challenging to pull off in the first place."