Aurelia Butler

TOKYO (Reuters) – The Bank of Japan’s strategy for an orderly exit from years of massive stimulus unraveled on an overcast day in December when Governor Kazuo Ueda and two deputies gathered at the bank’s Tokyo headquarters.Inflation was slowing more than expected, complicating the central bank’s plan to end negative interest rates by March or April and then follow quickly with further increases. The officials considered two alternatives.The first option was to wait for signs of economic improvement and then go ahead as planned. The second was to end negative rates but hold off on subsequent increases. Ultimately, the MIT-trained Ueda went with the second option, allowing Japan to shed its title as the last country with negative interest rates but leaving it short of its hoped-for normalisation and still facing years of near-zero rates that pressure the hard-hit yen.”With the economy lacking momentum, there was a growing feeling within the BOJ that inflation might not stay around 2% that long,” said one person familiar with the deliberations, referring to the bank’s key target.”The BOJ leadership probably realised that time was running short, if they wanted to end negative rates.”The decision was also complicated by differences between Ueda’s two deputies, as well as the governor’s wavering on the exit timing. The existence of the two plans, and other details about the deliberations, are reported for the first time by Reuters.This account is based on interviews with 25 incumbent and former central bank officials with direct knowledge of the interactions, or familiar with the personalities and dynamics of the bank’s leaders, as well as five government officials in regular contact with BOJ officials.They all spoke on the condition of anonymity as they were not authorised to discuss the matters publicly.A BOJ spokesperson said the bank would not comment on the deliberations outlined by Reuters. Reuters also spoke to five small-business owners to gauge how the policy shift could unfold across an economy battered by decline and deflation.On Tuesday, the BOJ drew the curtain on eight years of negative rates and other remnants of unorthodox policy, delivering its first increase in borrowing costs since 2007.”It’s a watershed moment for Japan and for central banks across the world, as it finally puts an end to abnormal monetary stimulus,” said former BOJ official Nobuyasu Atago.Still, he said, it could take several years for short-term rates to move up to even 1%.LOCAL TREMORS Even a slight rise in interest rates could send tremors through struggling local economies in Japan, reflecting how deflation and a diminishing population have squeezed demand.”The prospect of higher interest rates has become a significant concern for traditional inns,” said Koji Ishida, who runs a hotel company and heads the local tourism association in Yugawara, a hot-spring resort southwest of Tokyo known for its ryokan, or traditional inns.In autumn, Ishida received a frantic call from the family that owns one of the town’s most storied ryokan, saying it was nearing collapse and asking for help.”As neighbours, we needed to help them,” Ishida said. He worried the failure of a prominent ryokan could tarnish the image of tourism-dependent Yugawara and trigger “a chain reaction of bankruptcies”.Seiranso, a 94-year-old ryokan known for its mountainside outdoor bath at the foot of a waterfall, last month filed for bankruptcy protection with around 850 million yen ($5.7 million) in debt, including pandemic loans.Under those proceedings, it aims to turn itself around with backing from Ishida’s company, according to its website. A lawyer for Seiranso declined to comment.Almost one-third of ryokan lost money in the last financial year, according to data from the Japan Ryokan and Hotel Association, an industry group.”The industry needs zero-interest rates,” said Masanori Numao, whose family runs a ryokan in Kinugawa Onsen, a hot-spring resort in Nikko National Park, where their roots go back more than 300 years.Forty years ago, Kinugawa was thriving; after sunset there were “beautiful geisha”, the clatter of wooden geta clogs and laughter from karaoke bars that lined the narrow streets, Numao said.Today, tourists sometimes photograph derelict hotels abandoned after the bubble economy burst in the early 1990s. Ryokan owners struggle to renovate ageing buildings because banks are unwilling to lend them more, making it difficult to attract tourists, Numao said. Higher interest rates would increase pressure on hot-spring towns like Kinugawa, he said. “The government is just watching resort towns drown.”POLICY DIFFERENCESIn taking over the BOJ last April, Ueda was mandated to dismantle the radical stimulus of his predecessor, Haruhiko Kuroda.Kuroda’s “bazooka” approach initially helped boost stock prices. But it crushed bank margins and caused unwelcome yen declines that lawmakers feared could hurt voters through rising living costs.Ueda and his deputies were unanimous on the need for an exit, but not on the timing.Choosing the second option mended, at least momentarily, the quiet tension between the two deputy governors, career central banker Shinichi Uchida and former bank regulator Ryozo Himino.Ueda, Uchida and Himino did not respond to Reuters questions.Uchida was cautious about ending negative rates too hastily, believing that the BOJ should allow the economy to run hot by keeping ultra-low rates for a prolonged period.By contrast, Himino favoured an early exit from what he saw as excessive monetary support that could sow the seeds of a future bubble.As an outsider, Himino wasn’t afraid to challenge some of the bank’s traditions.At one informal meeting late last year, he complained about the BOJ’s management style and suggested changes, ruffling feathers among some officials within the institution, according to two people with knowledge of the matter.Throughout the discussions, Ueda would listen silently and rarely spoke up. People who know him say the governor was neither a hawk nor a dove.Having studied under former Federal Reserve vice chairman Stanley Fischer, who also taught former central bankers Ben Bernanke and Mario Draghi, Ueda combined faith in economic models and a sense of pragmatism.However, he was not quick to make decisions, opting to analyse various options thoroughly until the last minute. “He’s a pure academic who’s great at comparing data and strategies,” said a person who has known Ueda for decades. “But making quick, decisive decisions isn’t his strength.”While the two deputies rarely exhibited differences in public, it was usually Uchida who prevailed. Ueda relied heavily on Uchida’s expertise on the technical aspects of the bank’s monetary tools.Uchida was also the main interlocutor with officials from Prime Minister Fumio Kishida’s government, sounding out their views on monetary policy and laying the groundwork for an exit.Kishida’s administration had been nudging the BOJ to phase out stimulus in hope it would slow declines in the yen that were hurting households through higher food and fuel costs.”The government hopes the BOJ conducts monetary policy appropriately towards sustainably and stably achieving its price target accompanied by wage increases, with an eye on economic, price and financial developments,” a spokesperson for the prime minister’s office told Reuters.Once there was consensus the BOJ would go with the second option, Uchida proceeded with the next step of preparing markets.In a speech in Nara in February, Uchida hinted at what a post-negative rate monetary policy would look like.Tuesday’s policy shift roughly aligned with those clues.Ueda’s choice of the second option means the BOJ will keep rates at zero for a prolonged period, delaying Japan’s return to normal borrowing costs, said five of the sources familiar with the bank’s thinking. It will likely take years to reduce the bank’s balance sheet, which had ballooned after heavy asset-buying, three analysts told Reuters.There is near-consensus among BOJ watchers that the bank will move very gradually, and allow short-term rates to rise to around 0.5% over several years.”Given Mr. Ueda’s very cautious character and his focus on building consensus within the board, he will likely take plenty of time and proceed carefully in normalising policy,” said former BOJ economist Hideo Hayakawa.($1 = 148.3800 yen) More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.In a more mercantilist world, a clear pattern is emerging in India’s trade policy strategy: if companies or countries want freer access to the big and growing markets of the world’s fifth-biggest economy, they must offer a quid pro quo. Switzerland and Tesla Motors last week each managed to get India to lower its high, jealously guarded tariff walls and offer improved access to its market of 1bn-plus people.On March 10, Switzerland, along with Norway, Iceland and Liechtenstein, finally managed to sign a free trade agreement between their European Free Trade Association and India, after 16 years and 21 rounds of talks. Separately, India’s government signed off on a plan to lower import taxes on some higher-priced, imported electric vehicles. In both cases, there was something substantial in it for India: a promise, or at least a possibility, of investment.The India-EFTA Trade and Economic Partnership included a pledge by the Swiss and their smaller partners to invest $100bn in India and create 1mn jobs over 15 years — the first such binding commitment in the history of FTAs, according to Narendra Modi’s government.At a press briefing Helene Budliger Artieda, a Swiss official, said the negotiators were guided in their work by “how can we can a balanced deal, and ‘what’s in it for India’”; the latter phrase, she said, having been uttered to her by India’s feisty commerce minister Piyush Goyal. “The investment promise was the carrot that sealed this deal,” Biswajit Dhar, distinguished professor at the Council for Social Development, a think-tank, says of the India-EFTA pact. In the case of cutting EV tariffs, Tesla had been pushing for this as a precondition for investing in a factory in India that, if built, would make smaller, lower-priced EVs. The tariff reduction would allow it to import its foreign-made and pricier cars as it scaled up. While the easing is available to any automaker who invests within three years, Indian officials acknowledge it was drawn up largely with Tesla in mind. New Delhi’s protectionist bent is legendary. From the “import substitution” policies of its early, socialist-influenced post-1947 governments to Modi’s current pro-business administration, India has been guided by an instinct to shield sensitive industries from competition. But pro-trade economists point to the perils of picking winners and letting them sit behind tariff barriers.The Modi government has in fact pursued and signed trade pacts during nearly a decade in power — most recently with the United Arab Emirates and Australia, the latter of which relaxed visa regulations for Indian students at Australian universities after they graduate. India in 2019 declined to join the Regional Comprehensive Economic Partnership, largely for fear it would make its producers more vulnerable and cause trade deficits to swell, including with China. Liberalising too much would imperil Modi’s “Make in India” push to boost manufacturing jobs and exports, officials apparently believe. India’s FTA talks with the UK and EU, far larger economies with greater bargaining power, which would pose Indian industry with bigger competitive threats, have moved more slowly. Reports from the UK-India trade talks offer some indications of what India might agree to.In 14 rounds of negotiations, UK and Indian officials tell the Financial Times, India has been pushing for greater market access for its goods, including textiles and automotives. As for services, India wants the right for more temporary work for its people in the UK — notably in IT, a sector where it has competitive skills and manpower — and the right to claw back any national insurance payments. But the talks with the UK are now on ice at least until after the Indian general election, the results of which are due on June 4.“The biggest gain India is looking to trade off in the FTA talks on services is human mobility,” says Syed Akbaruddin, dean of the Kautilya School of Public Policy in Hyderabad. India has also pressed the case, in its talks with the UK, EFTA and others, that it is a faster-growing economy than the richer ones it is negotiating with. So any lowering of tariffs should be asymmetrical in its favour, Goyal and other officials argue, because India is offering market access to a slice of a growing pie. The India-FTA pact serves as one example of this, where the European countries cut more tariffs than India did. “The world recognises there’s no other country in the world which offers a market like India,” Goyal told the FT in an interview in 2022. The Modi government is calculating, rightly or not, that the world needs it enough to offer it substantial concessions in [email protected] More

(Reuters) – A look at the day ahead in Asian markets.The central bank policy party rolls on into Wednesday with China and Indonesia under the spotlight in Asia ahead of the main event in Washington later in the day, as investors continue to digest the Bank of Japan’s historic rate hike the day before.The yen fell to a four-month low on Tuesday, hurtling towards 151.00 per dollar as investors took the BOJ’s messaging to mean any further tightening will be gradual. If so, rate and yield spreads will continue to support major currencies like the dollar at the expense of the yen. The “carry trade” dynamic could be underscored even more on Wednesday by the Federal Reserve’s policy statement, updated economic projections and Chair Jerome Powell’s press conference.The yen’s slide on Tuesday bucked the trend among major global currencies and pushed it back within sight of the recent multi-decade lows around 152.00 per dollar.The weak yen goes hand in glove with stronger Japanese stocks – the Nikkei 225 is back above 40,000 and within touching distance of its record high 40,472 points from earlier this month. A new high on Wednesday?Markets across the continent could open Wednesday in buoyant mood and shrug off the previous day’s weakness, thanks to another rise on Wall Street and fall in U.S. bond yields.Any upside could be limited, however, by investors’ reluctance to take on too much exposure ahead of the Fed. And although China’s economic surprises index is at a 10-month high, worries persist over the country’s property crisis.This helps explain why 30-year Chinese government bond yields are down 40 basis points this year, recently hitting a record low of below 2.4% and coming within a whisker of dropping below 10-year yields, which also have hit 22-year troughs.Analysts reckon the People’s Bank of China will leave its one- and five-year loan prime rates unchanged, after it left key bank lending rates on holds earlier this month. Despite the deflationary pressures still stalking the economy, monetary policy has “pretty much reached the limits of what it can do … and so any further easing is likely to be modest,” according to Win Thin at BBH.Bank Indonesia, meanwhile, is also expected to hold rates for a fifth month on Wednesday but cut in the second quarter of the year, according to a slim majority of economists in a Reuters poll.With inflation within the target range of 1.5% to 3.5% since July and the economy showing signs of a slowdown, all 31 economists in the March 8-15 poll agreed the central bank’s next move would be a cut. The only issue is when.Here are key developments that could provide more direction to markets on Wednesday:- China LPR decision – Indonesia monetary policy decision- U.S. Fed policy decision (By Jamie McGeever; Editing by Lisa Shumaker) 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 on-site version of our FirstFT newsletter. Sign up to our Asia, Europe/Africa or Americas edition to get it sent straight to your inbox every weekday morningGood morning. It’s the beginning of a new era in Japan — the country’s central bank raised borrowing costs yesterday for the first time since 2007 in a historic pivot away from negative interest rates.Following a 7-2 majority vote, the Bank of Japan said it would guide the overnight interest rate to remain in a range of about zero to 0.1 per cent, making it the last central bank to end the use of negative rates as a monetary policy tool. Its benchmark rate was previously minus 0.1 per cent.The BoJ turned to negative rates in 2016 to encourage banks to lend more and stimulate economic activity. With yesterday’s decision, it is aiming to put decades of deflation behind it as signs emerge of broader change in the Japanese economy — including big pay rises that have given BoJ governor Kazuo Ueda enough confidence that mild inflation will continue.Despite the policy shift, Ueda signalled that borrowing costs would not increase sharply since inflation expectations have not yet met its target. With few signals of further rate rises, the yen weakened to a four-month low of ¥150.96 against the US dollar in Tuesday afternoon trading in New York. Our Tokyo bureau chief Kana Inagaki has more on the market reaction.Opinion: Does Tuesday’s decision mean Japanese monetary policy will be boring from now on? Perhaps for a little while, but a little while only, writes Robin Harding.Go deeper: The FT global inflation and interest rates tracker provides a regularly updated visual narrative of consumer price inflation and central bank policy rates around the world. See how your country compares.Premium subscribers can sign up for our Central Banks newsletter by Chris Giles for more on interest rates, inflation and what policymakers are thinking. Don’t have a premium subscription? Upgrade here. Here’s what else I’m watching on a busy day of monetary policy:China: The People’s Bank of China is widely expected to leave loan prime rates unchanged. (Reuters)US: The Federal Reserve is expected to keep interest rates at their current 23-year high. Indonesia: The country’s central bank has its interest rate announcement. Last month Bank Indonesia said it would keep rates on hold “for a while”. (Bloomberg)Economic data: The UK publishes February inflation figures while the EU reports consumer confidence data.Companies: Chinese internet giant Tencent and US semiconductor maker Micron Technology report results.Five more top stories1. Hong Kong has passed a tough security law after fast-tracking it through the legislature. Critics say the legislation, which imposes life imprisonment for crimes such as treason, will further erode civil liberties in the Chinese territory. The wording has also stoked concern among investors, auditors and financial analysts fearful of having their work branded as criminal.2. Adani Green, the renewable energy business owned by Indian billionaire Gautam Adani, said it was aware of a US government probe into a “third party” following a report that alleged his conglomerate was subject to a bribery probe. Here’s what we know about the investigation.3. Microsoft has hired Mustafa Suleyman, the co-founder of Google’s DeepMind and chief executive of artificial intelligence start-up Inflection, to run a new consumer AI unit. The FT’s Tabby Kinder reports on Microsoft’s latest move to capitalise on the boom in generative AI.4. The Abu Dhabi Investment Authority is seeking to capitalise on western investors’ retreat from China by offering to buy at a discount their stakes in funds managed by Hong Kong-based PAG. The move from Abu Dhabi’s main sovereign wealth fund is a sign of how some Gulf investors are looking to snap up bargains as US-based investors cut their China exposure.5. Chinese pharmaceutical group WuXi AppTec has said it is lobbying hard in Washington against a proposed bill that threatens its business in the US, where it generates 65 per cent of its revenues. US lawmakers have put the sector under scrutiny in relations with China and are seeking to restrict companies with federal funding from contracting with “foreign adversary” biotech groups deemed a national security threat.The Big Read© FT montage/Getty Images/APSince late July, when US regulators unveiled plans that they say will make banks safer, the issue of bank capital rules has been forced into the mainstream like never before, with adverts opposing the rules popping up in podcasts and television shows. Critics warn of dire consequences for “everyday Americans” if authorities push ahead with what they have apocalyptically termed “Basel Endgame”, while advocates of the new rules, which are stricter than globally agreed standards, say the concerns are overblown.We’re also reading . . . Nowruz: The festivities preceding the Persian New Year, which begins today, have brought people out on to the streets in a defiant show of freedom, writes Najmeh Bozorgmehr.Trump’s betrayal of Ukraine: If elected president in November, Donald Trump may hand Vladimir Putin victory over Ukraine. It will only hurt the US, writes Martin Wolf. Artificial intelligence: Too little attention is being paid to how AI could transform the state, writes Stephen Bush. While it might never be cheap enough to replace you at work, it is already changing how you are governed.Chart of the dayGoogle DeepMind has developed a prototype AI football tactician in collaboration with Premier League club Liverpool. The computerised coach’s suggested improvements to players’ positions at corner kicks mostly won approval from human experts, according to a paper published in Nature Communications. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Take a break from the newsA group of writers and popular historians argue that the ancient and medieval worlds were more closely linked than we used to think. Taken together, their books are bringing Asia to the centre of the map of global history, writes Nilanjana Roy. A map from the 1920s that shows the routes taken across Asia in the 13th century by Giovanni da Pian del Carpini, William of Rubruck and Marco Polo More

TOKYO (Reuters) – The Bank of Japan (BOJ) will scale back the maximum limit of its purchases of Japanese government bonds, it said on Tuesday, after ending its radical stimulus policies of negative interest rates and yield curve control (YCC).The BOJ has been an aggressive bond buyer to defend its ultra-low rate policy. That has pushed its ownership to more than half the market, putting a squeeze on liquidity and impairing market function.In its monetary policy statement, the bank said it will continue its JGB purchases at broadly the same amount as before.However, it also made cuts to the stated maximum limit of bond purchase amounts. The changes will apply to all bond maturities and for the April-June period. For 5-10 year JGBs, the BOJ will purchase up to 550 billion yen, from 900 billion yen previously. For 3-5 year bonds, it will purchase up to 500 billion yen, compared with 750 billion yen previously. These “drastic cuts” at the maximum end signals the BOJ will gradually step down its involvement in the market through bond-buying operations, said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui (NYSE:SMFG) Trust Asset Management. “Yields may rise, but psychologically, this is positive news for market players. This means the BOJ has started to allow the market to control yields.”The central bank will conduct bond buying operations at the same frequency across the curve as before.The announcement comes as the BOJ ended its negative interest rate policy and ditched its bond yield control at its latest meeting, ushering in a new era of monetary policy in Japan. It also discontinued its purchases of risky assets such as exchange-traded funds (ETF), which it began buying in 2010 as part of its massive stimulus programme. The BOJ increased their purchases several times until March 2021 when it decided to step in only during huge market turbulence, which traders had interpreted as declines of 2% or larger in Japan’s Topix index. The central bank skipped ETF purchases last week despite a sharp drop in local shares. More

According to the survey, 16 of the 17 analysts polled predicted the Bank of Mexico will cut the rate by 25 basis points to 11%, following in the footsteps of other regional central banks which began to lower their rates last year. Only one analyst polled by Reuters expects the bank, known as Banxico, to maintain the interest rate at the current 11.25%, where it has been since March of last year, the highest level since 2008.”The adjustment would respond to the decline in inflation and the current restrictive level of the monetary stance,” said the Actinver firm in an analyst note. “Despite our expectation of a rate cut, we are not considering the start of an aggressive rate cycle,” it added.The expected rate cut would be the first since the central bank began tightening monetary policy in June 2021 in the face of inflation, pandemic-era supply chain disruptions and the economic fallout of Russia’s invasion of Ukraine.During its most recent meeting, the central bank said the the possibility of easing its monetary policy would be on the table, depending on the progress of its efforts to reign in inflation.The general consumer price index (CPI) slowed more than expected in February, yet it still stood at 4.40% year-on-year, above the goal of 3% +/- percentage points.Banxico will publish its monetary policy decision on Thursday at 1:00 p.m. local time (1900 GMT). More

FRANKFURT (Reuters) – European Central Bank policymaker Martins Kazaks said on Tuesday he was “comfortable” with investor bets on three interest rate cuts by the central bank by the end of the year.Many ECB policymakers have expressed support for a first reduction in borrowing costs from their current record highs, most likely in June, with the debate now focused on how many more cuts would follow.Money markets are pencilling in three cuts by December with some chance of a fourth, which would lower the 4% rate the ECB pays on bank deposits to 3.25% or 3.0%.Kazaks, who in the past resisted speculation about imminent rate reduction, told Reuters this time market pricing was in line with the ECB’s own economic projections, which see inflation closing in on its 2% target by end of the year.”If I take a look at the current market pricing, for the last month or so, I’m quite comfortable with that,” the Latvian governor said in an interview on Tuesday.Kazaks, however, cautioned his words should not be taken as a commitment, or “forward guidance” in central bank parlance.”I will not provide forward guidance saying there will be three cuts because we’ll take a look at each meeting,” he said.The ECB will hold policy meetings on April 11, June 6, July 18, Sept 12, Oct 17 and Dec 12.Kazaks said moving at meetings at which new forecasts are published — that is in June, September and December — was “more straightforward”, echoing his Dutch colleague Klaas Knot.By contrast, Greek central bank governor Yannis Stournaras said two cuts before the ECB’s summer break in August seemed reasonable, followed by two more by the end of the year.Kazaks stressed there was a difference between cutting rates three or four times but, with the policy rate now at 4%, there was still a long way to go before the ECB’s policy was no longer restrictive.”Even if we start reducing the rate it’s going to take some time before we get the neutral rate,” he said. “By reducing the rate we only reduce the tightness of monetary policy, but it will remain restrictive.” More