Aurelia Butler

TOKYO (Reuters) – The Bank of Japan is shifting to a more discretionary approach in setting policy, with less emphasis on inflation, sources said, as the central bank maps its monetary path following the historic decision to end a radical stimulus programme in March.With monetary settings seen on hold, market players are focusing on the BOJ’s fresh quarterly growth and price projections due at its April 25-26 policy meeting, for hints on how soon it may hike rates again. While the central bank is expected to project inflation to stay around its 2% target through early 2027, such forecasts alone won’t serve as strong hints of a near-term rate hike, say three sources familiar with its thinking.”Various data must be scrutinised, not just the inflation outlook,” one of the sources said, pointing to the importance of other indicators such as consumption, wages and the broader economy.BOJ officials, including governor Kazuo Ueda, have said the focus would be on whether wage increases will broaden, and prod firms to hike prices not just for goods but services. The BOJ ended eight years of negative rates and other remnants of its unorthodox policy last month, making a historic shift away from its focus on reflating growth with decades of massive monetary stimulus.Many market players expect the BOJ to hike rates again this year with bets split between the chance of action in July, or sometime in the October-December quarter.In the days after ending negative rates in March, Ueda said the central bank would revert to a “normal” monetary policy that lets various data guide the future rate hike path.”It’s dependent on data,” Ueda told a newspaper interview published on April 5, when asked whether the BOJ could raise rates this year. “We’ll adjust interest rates according to the distance towards sustainably and stably hitting 2% inflation.”The remarks suggest the BOJ could hike rates regardless of its inflation forecasts, as long as it becomes more convinced than before that Japan will sustainably hit its price goal.Such a discretionary approach may require market players to scrutinise subtle changes in the way the BOJ describes the economy and inflation, for hints on its policy moves.Ueda’s new approach also heightens the importance of upcoming data, particularly those on wages and consumption.Consumption has recently been weak on rising living costs and slumping auto sales, raising the risk of an economic contraction in the first quarter.A rebound in consumption – likely a prerequisites for another rate hike – could happen later this year as wage hikes, summer bonus payments and scheduled government cash payouts around June give households more purchasing power, analysts say.”Given Ueda’s data-dependent stance, the BOJ probably wants to confirm that growth will pick up in the second quarter,” said Mari Iwashita, chief market economist at Daiwa Securities.”If so, it’s hard to say enough data would be available at the time of the BOJ’s July meeting” to hike rates, she said.Japan’s April-June gross domestic product (GDP) data will be released on Aug. 15, weeks after the BOJ’s July 30-31 meeting.Under current forecasts made in January, the BOJ expects inflation excluding fresh food and fuel to hit 1.9% in both fiscal 2024 and 2025. Reflecting prospects for sustained wage growth, the board may revise up the forecasts, and project inflation to stay around 2% through fiscal 2026, analysts say. More

The first quarter earnings season is set to continue this week, with more numbers scheduled from the all-important U.S. banking sector.JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) got the season off to a lackluster start on Friday, with the three big banks disappointing investors, weighing on Wall Street. Goldman Sachs (NYSE:GS) will be in the spotlight Monday, with the influential investment bank set to report its latest results before the opening bell.Investors will be looking to see what Goldman estimates for net interest income, or the difference between what a bank earns on loans and pays out for deposits, given the prolonged period of higher interest rates.Additionally, investors will be looking to see if Goldman responds to recent calls for it to split the CEO and chairman roles held by David Solomon.An independent chair “is nearly always preferable to having a single individual lead both the board and the executive team,” influential proxy adviser Glass Lewis wrote earlier this month, reiterating a recommendation from last year.U.S. stock futures edged higher Monday, rallying after the selloff at the end of last week, although any gains are likely to be limited by news of escalating tensions in the Middle East.By 04:10 ET (08:10 GMT), the Dow futures contract was 155 points, or 0.4%, higher, S&P 500 futures climbed 28 points, or 0.6%, and Nasdaq 100 futures rose by 105 points, or 0.6%.The main indices closed sharply lower on Friday, with the Dow Jones Industrial Average dropping almost 500 points, or 1.2%, the S&P 500 falling 1.5%, its worst day since January, and the Nasdaq Composite dropping 1.6%.The losses resulted in the DJIA shedding 2.4% last week, its worst week since March 2023, the S&P 500 sliding 1.5%, its worst week since October 2023, while the Nasdaq Composite Index dropped 0.5%, its third negative week in a row. Investors will be digesting the raised tensions in the Middle East after Iran launched drones and missiles on Israel on Saturday night, although risk has been capped after U.S. President Joe Biden told Israeli Prime Minister Benjamin Netanyahu that the U.S. will not take part in a counter-offensive against Iran.Elsewhere, the quarterly earnings season continues, with results from Goldman Sachs [see above] the highlight, while March retail sales will be the main economic data release. Apple (NASDAQ:AAPL) appears to have lost its crown as the world’s No.1 phone maker, with data from research firm IDC indicating that Samsung (KS:005930) has regained that spot in the wake of the iPhone maker’s weak first quarter.Apple’s smartphone shipments dropped about 10% in the first quarter of 2024, a period when global smartphone shipments increased 7.8% to 289.4 million units.Samsung, at 20.8% market share, regained the top spot from Apple, after the U.S. tech giant’s strong performance in the December quarter when it overtook the South Korean company as the world’s No.1 phone maker. Apple is back in second spot, with 17.3% market share, while Xiaomi (OTC:XIACF), one of China’s top smartphone makers, occupied the third position with a market share of 14.1% during the first quarter.Tesla (NASDAQ:TSLA) may be about to announce large scale redundancies as it grapples with worsening sales, according to separate reports from Business Insider and Electrek. The reports come after the electric vehicle giant reported a sharp drop in first quarter deliveries, amid weakening demand and increased competition in China, the world’s biggest auto market.It also set weaker production targets for 2024, and doubts remain over whether it will continue with plans for a low-cost EV. The reports indicated that Tesla could announce the layoffs as soon as this week, with the Electrek report suggesting they could be as high as 20%, while Business Insider reported that Tesla had already shortened production shifts for the Cybertruck.In a note released last week, analysts at UBS revealed that its survey results point to a tougher road ahead for the electric vehicle maker.The investment bank said that plateauing EV demand and more China competition could impact Tesla’s near-to-mid-term growth.“Given the survey results show outside of China, a continued plateau in EV demand and inside of China, more competition, we view the results as headwinds to TSLA unit growth over the coming years,” stated UBS.Crude prices retreated Monday as the limited damage done by Iran’s attack on Israel late on Saturday lessened fears about a wider regional conflict, potentially hitting supply from this oil-rich region.By 04:15 ET, the U.S. crude futures traded 1.2% lower at $84.61 a barrel, while the Brent contract dropped 1.1% to $89.44 per barrel.An attack by Iran had been widely expected in retaliation for a suspected Israeli air strike against a top Iranian military commander in Damascus last week, and the crude benchmarks had risen on Friday to their highest levels since October.“The market had already priced in some form of attack, while limited damage and no loss of life means the potential for a more measured response from Israel. How Israel responds is now the key uncertainty,” said analysts at ING, in a note.The announcement from the U.S. that it will not take part in a counter-offensive against Iran, has also limited concerns.Iran is the third-largest producer in the Organization of the Petroleum Exporting Countries, producing over 3 million barrels per day of crude, and a full-blown war with Israel would likely severely hit global supply in an already-tight market. More

Simkus, making some of the most dovish comments since the ECB’s policy meeting on Thursday, also said the bank could lower its 4% deposit rate in both June and July. “There is a more than 50% probability that there will be more than three rate cuts this year,” Simkus told reporters in Vilnius. “Three rate cuts is a conservative estimate.”The ECB put a rate cut for June on the table last week but ECB President Christine Lagarde said the bank was not signalling any move beyond that, given uncertainty for both growth and inflation. Markets price just three cuts this year as expectations have retreated in recent weeks after unexpectedly high U.S. inflation data pushed Fed rate cut bets out until the autumn.”I see a nonzero probability that interest rate cut could also be in July,” Simkus said. Simkus played down the impact of Fed decisions, arguing that the ECB will make independent decisions and the only issue at play is how a diverging rate trajectory impacts the real economy. “I reject the idea that eurosystem is taking decisions based on what U.S. policymakers are doing. There is no connection there.” “But obviously policy divergence changes trade conditions and economic development in both jurisdictions. This is reflected in forecasts and monetary policy decisions,” Simkus added. Simkus argued that economic surprises are unlikely to overwrite plans for a June rate cut but said that an unexpected escalation of global political tensions could still impact the ECB’s plans. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an onsite version of our Europe Express newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday and Saturday morning. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. A scoop to start: Enrico Letta, the man tasked by EU leaders with assessing the health of the bloc’s single market, told the Financial Times his conclusions to be delivered this week would be stark: the single market was “fake”, and without deeper integration Europe would not “have any economic security”. Read our exclusive interview.Today, I parse Europe’s role in the spiralling Israel-Iran crisis, and our Berlin bureau chief reports on German chancellor Olaf Scholz’s trip to China.Who has your vote in June’s EU elections? Listen to economic experts from major parties debate their visions for Europe’s future at a debate co-hosted by Bruegel and the Financial Times this evening, live in Brussels or online.Peace pleasEU capitals are discussing imposing new economic sanctions against Iran while using all the diplomatic pressure channels they have with Tehran, as part of a global effort to avoid a direct confrontation between the Islamic Republic and Israel.Context: Iran fired 300 missiles and drones at Israel early yesterday morning, its first-ever direct strike on the country after years of shadow conflict. That drastically raises the risk of a full-blown regional war in the Middle East. Tehran’s attack was in response to a suspected Israeli strike on its consulate in Syria, and followed clashes between Israel and Iranian proxies linked to the war in Gaza.Through a surge of crisis diplomacy that culminated in an emergency video meeting of G7 leaders yesterday, European capitals agreed three focus areas: condemning Iran and expressing solidarity with Israel; drawing up plans for potential sanctions; and using whatever leverage they still have over Tehran to plead for a cooling of tensions. EU officials have had “an enormous amount of contact” with Iranian counterparts in recent days, according to people familiar with the calls, in a bid to “put guardrails” on the hostilities. Those included a conversation between EU chief diplomat Josep Borrell and Iranian foreign minister Hossein Amir-Abdollahian, where Tehran was urged “not to escalate further”.EU foreign ministers are scheduled to have an emergency video meeting of their own tomorrow, which should give Brussels an opportunity to assess possibilities for sanctions. Some G7 leaders proposed designating the Islamic Revolutionary Guard Corps defence force as a terrorist organisation, a proposal that the EU has long mulled but consistently failed to find consensus on. Ursula von der Leyen, European Commission president, said sanctions on Iran’s “drone and missile programmes” were being considered.Much also depends on Israel’s response. The country’s war cabinet met yesterday evening to discuss how to proceed, with the US leading the G7 effort to convince Prime Minister Benjamin Netanyahu to not take military action that Washington fears could precipitate a “wider war”.“All parties must exercise restraint. We will continue all our efforts to work towards de-escalation,” said EU Council president Charles Michel after the G7 call, adding that the topic would be discussed at an EU leaders’ summit this week.Chart du jour: Tax the richYounger generations are set to inherit trillions of dollars accumulated by baby boomers. As government purses are increasingly strained, should they tax the great wealth transfer?Packed agendaGerman Chancellor Olaf Scholz is in China to discuss Beijing’s controversial support for Russia in the war against Ukraine and the state of the Sino-German economic relationship.But Iran’s attack on Israel has been keeping the German leader busy from afar, writes Guy Chazan. Context: The EU has been trying to reduce its dependency on China, one of its most important trading partners. The German economy is particularly entangled with China’s, as businesses rely on products and materials from China and have heavily invested in the Chinese market.Scholz’s trip aims to bolster Germany’s relationship with its biggest trading partner and resolve increasing tensions over Chinese trade practices.But Scholz will also ask China to reconsider its staunch support for Russia in the war against Ukraine. Ahead of the trip, a senior official said Germany was concerned about China supplying Russia with dual-use technologies that were helping its war effort. China was “siding with the aggressor, and that raises fundamental questions about Chinese foreign policy”, the official said. Scholz will also try to persuade President Xi Jinping, whom he is meeting tomorrow, to exert his influence on Russian President Vladimir Putin to explore ways of ending the war.“The hope is that China will become more engaged in resolving this conflict,” said another official. “China is walking this narrow path between closeness and distance to Russia.”But Iran could end up dominating the trip. Scholz, who spoke to G7 leaders from his hotel room yesterday, said that “in these difficult hours, Germany will stand closely at Israel’s side”. German officials also hope that Scholz will be able to persuade Xi to influence Iran and prevent an escalation of the conflict in the Middle East. What to watch today France, Germany and the EU host an international humanitarian conference for Sudan in Paris. Informal meeting of EU energy ministers.Now read theseRecommended newsletters for you Britain after Brexit — Keep up to date with the latest developments as the UK economy adjusts to life outside the EU. Sign up hereChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up hereAre you enjoying Europe Express? Sign up here to have it delivered straight to your inbox every workday at 7am CET and on Saturdays at noon CET. Do tell us what you think, we love to hear from you: [email protected]. Keep up with the latest European stories @FT Europe More

Policymakers at the World Bank and IMF spring meetings this week will grapple over more funds for debt-strapped nations and development goals as global crises stretch aid budgets. The International Development Association, the World Bank’s $200bn lending arm to the world’s poorest countries, is leading a wave of fundraising this year for “replenishment” of the equity that backs grants and loans needed to help countries struggling to pay back a decade of borrowing from China and bond markets.But this year a record number of other developmental organisations and programmes, including the World Health Organization and Gavi, the alliance rolling out the first anti-malaria vaccine, are also aiming to top up their contributions from western governments distracted by elections at home and wars in Europe and the Middle East. “There is a record amount of need and a record number of funds coming forward, meanwhile, the international community’s focus is elsewhere,” said Clemence Landers, senior policy fellow at the Center for Global Development, a think-tank. “The fact is that these funds need to be replenished to avoid poverty, health and other crises, and it is unclear if there is full-throttled political support to get to the numbers needed.”Overseas development assistance budgets, which rich countries typically use to allocate cash for development banks and multilateral funds, rose to a historic high last year, according to OECD data released last week. But the plethora of conflicts in Ukraine, the Middle East and Africa is draining budgets, even though multilateral sources are one of the few ways that developing countries can access fresh money for debt repayment and climate action.Total development assistance has increased by 46 per cent in nominal terms since 2018 to $223bn, according to the OECD. A large share of that growth has been driven by a 28-fold increase in aid to Ukraine since 2022. Meanwhile, according to anti-poverty advocacy group the One Campaign, assistance to multilateral funds such as the IDA and the Global Partnership for Education has only increased by 17 per cent since 2019, partly reflecting a decline in 2021-22 as money for Ukraine took priority for rich countries.Other gears of the financing machine for poor countries are either rusty or going into reverse. A handful of African countries this year have managed to tap international bond markets, after a two-year freeze amid rising interest rates. But they are paying up for the privilege. Kenya recently issued dollar debt with a yield of close to 10 per cent. The boom in loans from China, the biggest bilateral creditor to poor nations during the past decade, is also over. “For over 40 low- and middle-income countries, cumulative net debt flows from Chinese creditors since 2019 are now negative,” meaning countries are paying China back more on loans than is being disbursed, Jay Shambaugh, under-secretary for international affairs at the US Treasury, said last week.Beyond increases in humanitarian funding to war zones such as Gaza, the leading funders of IDA and other funds are likely to offer up less capital in the next year. Elections in the US and UK, and competing budget demands in other critical donor nations, such as economically stagnant Germany, are prompting funds to rethink how they could use debt leverage or other new methods to raise money.While their share of donor budgets has shrunk, multilateral funds have also proliferated in recent years, particularly those with single-issue remits, such as health or agriculture. “There is an issue of duplication, where too many funds seem to be chasing similar prospects . . . without co-ordinating their investments,” said Bright Simons, vice-president of research at Ghanaian think-tank Imani.“This results in an ‘overheads overhang’,” he added, where multiple bureaucracies are “all marketing a bewildered array of poorly differentiated financing solutions to overwhelmed developing countries”. While some of the flourishing number of funds can take in alternative private sources of investment, such as philanthropic cash, most legally cannot.Additionally, relatively few development funds have records of tapping capital markets to raise money. Despite its size and triple A credit rating, even IDA has only regularly issued bonds since 2018. Its issuance of about $30bn in bonds since then compares with many tens of billions more sold by the International Bank for Reconstruction and Development, the World Bank’s lending arm for middle-income countries. Both institutions have also typically issued this debt at maturities below 10 years, which means they are now encountering another problem — in the next few years they will replace maturing bonds by paying higher global interest rates to sell new ones, just as demand for their loans increases. Because much of IDA’s support is in zero-interest grants, it is particularly affected by this mismatch and is set to hit leverage limits sooner than was forecast just a few years ago.Others are calling for rich countries to use reserve assets dispensed by the IMF, the special drawing rights (SDRs) which equate to hundreds of billions of US dollars, to back more bond sales by the World Bank at a lower cost.Governments cannot use their SDRs to put more capital into the bank directly. But they could in theory buy bonds denominated in SDRs.“There is a very compelling case for using [SDR bonds] to fill some of the funding holes in IDA in particular,” said Brad Setser, a senior fellow at the Council on Foreign Relations. It would help reduce the cost of issuing longer-term bonds that are better matched to IDA’s multi-decade loans, he said. “Chinese policy lending has more or less dried up,” Setser said. “The bond market has opened up — but at a high price. Multilateral development banks right now are the only game in town.” More