Aurelia Butler

TOKYO (Reuters) – Japan’s bitter memories of its decades-long battle with deflation hang heavily over the central bank’s deliberations to take its first modest step away from ultra-loose monetary policy, even as inflation and wages creep up.The appointment of Kazuo Ueda as Bank of Japan (BOJ) governor this year and mounting price pressures have fired up market chatter that the new chief might hasten an exit from the bold stimulus of his predecessor Haruhiko Kuroda.But uncertainty over the wage outlook and emerging global economic weakness heighten the chance the BOJ will hold off tweaking its controversial yield curve control (YCC) policy at least until autumn, say three sources familiar with its thinking.”In a country that has seen interest rates stay ultra-low for two decades, the shock of the BOJ’s first move could be enormous,” said one of the sources. “That’s enough to make the BOJ cautious.”Japan has not seen interest rates rise since 2007, when the BOJ hiked short-term rates to 0.5% from 0.25% in a move later criticised for delaying an end to price stagnation.Having taken part in Japan’s battle with deflation as BOJ board member from 1998 to 2005, Ueda knows all too well the danger of a premature exit from ultra-loose policy.Wary of a wobbly recovery, he opposed the BOJ’s decision in 2000 to raise short-term rates to 0.25% from zero.The bank drew significant political heat for that tightening and was forced to reverse course just eight months later and adopt quantitative easing.Given the trauma of such ill-timed policy shifts, caution will be Ueda’s priority, the sources say, suggesting an end to YCC, which caps the 10-year bond yield around zero, could be some time away. That would mean more significant policy changes are even further down the track.”Tweaking the yield cap alone may not do much harm to the economy, as long as short-term rates are kept low,” one of the sources said. “But the BOJ’s long, historical struggle with deflation can’t be taken lightly.”SHIFTING PRIORITIESOne key difference between the BOJ’s and the market’s thinking lies in Japan’s inflation outlook.On the surface, conditions for phasing out a portion of the BOJ’s massive stimulus appear to be falling in shape.Core consumer inflation hit 3.4% in April, holding above the BOJ’s 2% target for over an year, as companies continued to hike prices for a broad range of goods and services.Companies offered pay hikes not seen in three decades in this year’s wage talks with unions, heightening hope of a sustained rise in pay after decades of stagnant wage growth.With robust domestic demand offsetting some of the external headwinds, the BOJ is widely expected to raise this year’s inflation forecasts at its next quarterly review in July.But inflation is now less of a trigger for an exit than it was in the past, as policymakers focus on risks that could again upend the path toward a sustained recovery.”If you know the U.S. economy could slow sharply due to aggressive rate hikes in the past, it’s natural for the BOJ to be cautious about phasing out stimulus,” a third source said.Weakness in China, a major market for Japanese manufacturers, also casts doubt over whether companies can reap enough profits to sustain wage hikes next year.To be sure, Ueda has left scope to tweak YCC in case inflation continues to overshoot the BOJ’s forecasts. At his debut policy meeting in April, he removed guidance pledging to keep rates at “current or lower levels.”In a group interview last month, Ueda said the BOJ could tweak YCC “if the balance between the benefit and cost of our policy shifts.”With Kuroda’s massive stimulus having failed to re-anchor inflation expectations around the BOJ’s target, however, Ueda has good reason to be cautious.Ueda last month said eradicating Japan’s entrenched deflationary mindset remained a difficult challenge and warned moving too quickly on rates was more dangerous than not moving fast enough.”The cost of waiting for underlying inflation to rise until it can be judged that 2% inflation has fully taken hold is not as large as the cost of making hasty policy changes,” he said. More

The RBI kept its policy repo rate at 6.50 basis points (bps) as unanimously expected, keeping it steady for a second consecutive meeting. But Governor Shaktikanta Das said that while inflationary conditions had improved in recent months, the bank would still watch for any upside risks to prices when adjusting monetary policy further this year. A reading on consumer price index (CPI) inflation is due next week, and is expected to show inflation remained buoyant through May after hitting an 18-month low in April. But it is still set to remain well above the RBI’s 4% annual target. The RBI is set to carry out further withdrawal of accommodative monetary policy, Das said, although he did not specify whether the move would entail more rate hikes.The RBI governor warned that inflation will not fall below the bank’s target level in the near-term, and is likely to trend just above 5% in fiscal 2024. “Given the uncertainties, we need to maintain ‘Arjuna’s eye’ on the evolving inflation scenario,” Das said in a livestream, referencing a famous archer from the Sanskrit epic Mahabharata. Das said that domestic consumption and spending in India remained resilient, as the economy grew more than expected in the year to March 31, 2023. The RBI Governor said that the Indian economy will continue running strong this year, despite increased global economic headwinds. Gross domestic product is expected to finish fiscal 2024 at 6.5%, slightly lower than the 7.2% growth seen through 2023.Growth is also expected to accelerate sharply in the June quarter, with GDP forecast at 8%, Das said. The Indian rupee rose slightly after the RBI decision, as did Indian stocks, ducking a decline in their Asian peers. More

A top European Central Bank executive has hit back at accusations of mission creep, arguing that understanding the threats from biodiversity loss was critical for the economy and “not some kind of flower power” exercise.In an interview to mark its first major investigation into the economic and financial risks stemming from the degradation of the natural environment, Frank Elderson, an ECB executive board member, told the Financial Times that 72 per cent of eurozone companies and three-quarters of bank loans in the region are exposed to loss of biodiversity.“Destroy nature and you destroy the economy,” Elderson said, pushing back against critics who have claimed the ECB’s work on climate and environmental risk is overstepping its mandate and distracts from its main mission to fight runaway inflation. “This is not some kind of a flower power, tree-hugging exercise . . . this is core economics,” he said. “Even if I couldn’t care less about the planet, even if I couldn’t care less about biodiversity, I would say the exact same things.”The ECB studied data on 4.2mn companies in the 20-country single currency bloc to assess how many rely on at least one “nature-related service” such as pollination, clean water, healthy soil, timber, or sand, Elderson said, adding that 72 per cent was “quite a lot”. Using an example of the agricultural sector’s dependence on plant pollination by insects, he said: “We see insect populations dwindling and this will negatively affect crop yields.”“These physical risks affect supply and therefore they could also affect prices,” he added. “And this is where it could get into the realm of monetary policy, of price stability and of inflation.” The central bank found that 75 per cent of eurozone bank loans by number were to companies that are nature-dependent. The ECB expects to publish its full report in the autumn, but it has already been stepping up pressure on banks to tackle the risks from biodiversity losses. In 2020 it published a guide telling lenders how to change their risk management and disclosure to address climate and environmental risks. Elderson believes the central bank to do more to address green issues. “The economy relies on the services of nature,” he said. “This is also why we have to dig deeper.”He said 40 per cent of eurozone banks had not yet properly assessed their exposure to nature-related risks when it reviewed this last year. However, some lenders had started to earmark capital for environmental threats in their internal risk calculations, Elderson said, stressing that the ECB would use “carrots and sticks” to encourage others to tackle the issue. “The glass is not yet half full,” he added.Elderson’s remarks underline how central banks around the world are starting to assess the potential economic and financial risks from a degradation of nature, on top of the work they have already been doing to tackle the threats from climate change. The two issues partially overlap. Deforestation increases the risk of flooding, soil erosion and loss of tourism income, as well as adding to global warming. But Elderson said some areas of biodiversity loss were unrelated to climate change, such as flooding risk from a reduction of mangrove forests.Similar assessments to the ECB’s have been carried out in France, the Netherlands, Brazil, Malaysia and Singapore. The Bank of England is examining potential financial risks from nature loss, working towards a report due out around the end of this year, after it found 72 per cent of UK loans were to companies reliant on “ecosystem services”.However, former Bank of England governor Mervyn King has said central banks are risking their independence by “moving into the political arena” with their work on climate and environmental risks, while US Federal Reserve chair Jay Powell has promised to “stick to our knitting” and not become a “climate policymaker”.The Fed launched its first assessment of how climate-related events could impact the country’s six biggest banks in January. The ECB is also examining how changes to government policy, consumer preferences and investor behaviour in response to environmental damage could impact the most polluting companies, the banks that finance them and the wider economy.Elderson gave the example of governments trying to tackle the loss of insect populations by banning some pesticides. “That is a transition risk. If you are the pesticide manufacturer, maybe your product is going to be phased out or prohibited.”The ECB found a higher reliance on nature-related services than earlier studies by the French and Dutch central banks, which looked at a more limited national sample of companies that have issued debt or equity securities. France’s central bank said in 2021 that 42 per cent of securities held by French financial institutions were issued by companies that were highly or very highly dependent on an “ecosystem service”. The Dutch study a year earlier found the equivalent figure for its institutions was 36 per cent.The eurozone average is pushed up by higher exposures in countries such as Germany, Italy and Austria. The ECB also included indirect exposures, such as from a company’s supply chain. Excluding these, the ECB said 61 per cent of eurozone bank loans were to companies directly exposed to an ecosystem service. More

It’s tough being a global trading power tussling for geoeconomic pre-eminence when you can’t sign binding trade deals, but that’s more or less where the Biden White House finds itself. A decade ago, when the Obama administration was driving forward the Trans-Pacific Partnership regional mega-deal, you’d have been laughed out of Washington for predicting that, the US having abandoned the agreement, Beijing would apply to join a pact originally designed to counter China’s economic heft. But the toxicity of formal trade agreements on Capitol Hill, which predates President Joe Biden and even Donald Trump, and among Biden’s voter base has in effect shut off one of the US’s main vehicles for projecting economic influence.Searching for an Asia-Pacific alternative to what is now the CPTPP (prefixed with “Comprehensive and Progressive”), the US last year announced the Indo-Pacific Economic Framework, a series of deals with 13 other nations.Its first results, of an initiative on supply chains, were unveiled nearly two weeks ago. They were unimpressive. The US announcement was a mass of abstract verbiage with a tangle of subclauses festooned with adjectives and adverbs layered two or three deep. It pledged, among other things, to “ensure that workers and the businesses, especially micro-, small-, and medium-sized enterprises, in the economies of IPEF partners benefit from resilient, robust, and efficient supply chains by identifying disruptions or potential disruptions and responding promptly, effectively, and, where possible, collectively”. All clear now?In the time-honoured tradition of talking shops reproducing themselves, the announcement has no binding mechanisms but instead sets up a new Supply Chain Council, a Supply Chain Crisis Response Network and — this being the Biden administration — a Labor Rights Advisory Board.The IPEF’s fundamental flaw is exactly that predicted by experienced trade folks from the beginning. Without substantial new access to the US market or other trade privileges on offer, there’s little incentive for partner countries to make big commitments themselves. The IPEF will not substantially reroute value networks away from China or otherwise meaningfully counter Beijing’s geoeconomic influence.Certainly, the IPEF has acquired some of the political trappings of a formal preferential trade agreement. Guided by muscle memory, familiar characters from PTA controversies of past decades have lumbered into action. A range of US business organisations from the Software & Information Industry Association to the National Pork Producers Council have complained there isn’t enough in it for them. Congress has been huffing and puffing about its prerogatives, in this case whether it gets to veto the agreements. Environmental and labour campaigners including the non-governmental organisation Public Citizen, those trusty old warhorses of the globalisation-sceptic movement, have risen to their feet at the sound of distant bugles and organised a demonstration outside an IPEF ministerial meeting. The IPEF isn’t a trade agreement so much as a TPP re-enactment society: some impressive-looking battles with realistic replica weapons but no one getting hurt.Now, it’s certainly true, as the Biden administration argues, that there are other ways to do trade policy than big multi-stranded PTAs, which other leading trading powers such as the EU are also struggling to get signed and ratified. The academic and former US official Kathleen Claussen has pointed out the quiet but rapid proliferation of smaller US deals on issues from food regulation to consumer privacy protection over recent years. Those relatively sympathetic to the administration’s negotiating strategy, such as Chad Bown, of the Peterson Institute think-tank in Washington, say the IPEF could be a vehicle for creating targeted agreements on critical raw materials supply and other friendshoring arrangements. But, as the US has shown with its critical minerals deals with Brussels and Tokyo — essentially a means of granting European and Japanese companies access to electric vehicle tax credits under Biden’s Inflation Reduction Act — these can be done swiftly and ad hoc. They don’t need a cumbersome region-wide negotiating structure.Indonesia, for example, an IPEF member, is being courted by China and other automotive manufacturing economies for its rich deposits of nickel, used in electric vehicle batteries. Indonesian producers want a critical minerals agreement with the US to unlock IRA tax credits and give them incentives to export there — in some ways a similar lure to old-style preferential market access. If the US is serious about turning Indonesia into a reliable part of its auto supply chain, it should move quickly and do a bilateral deal rather than wait for the next dense slab of IPEF rhetoric to slide off the bureaucratic production line in several months’ or years’ time.The Biden administration is right that geopolitics and value networks are changing too quickly for old-style trade agreements to address on their own. But smaller, more targeted deals still need incentives to work. The IPEF produces a lot of words but few commercial rewards. The real business of building trade alliances will go on [email protected] More

Highly uncertain inflation, accumulated financial imbalance, and credit risks related to the real estate market are among issues that required to be considered before changes to the monetary policy, the central bank said. “Additional rate hikes by the U.S. Federal Reserve or an early shift in the domestic policy stance may increase downward pressure on the local currency,” the Bank of Korea (BOK) said in its quarterly monetary policy report submitted to parliament. The BOK held interest rates steady for a third straight meeting last month, after 300-basis-point increases in 1-1/2 years through January, but also signalled it may not be done tightening.The current policy interest rate of 3.50%, the highest since late 2008, is at a restrictive level, slightly above the neutral range, the Bank of Korea said.However, the central bank said the degree of restrictiveness has lessened significantly this year with a sharp fall of interest rates in local financial markets.Volatility in the won has risen above its long-term average since early last year following the Fed’s interest rate hikes and exceeded that of most other currencies since August by a significant degree, the report said. Domestic factors such as trade deficits have recently fuelled the increased volatility, it said. The won has weakened by 3% against the U.S. dollar so far this year, following a 6% drop in 2022, when the South Korean currency once touched its lowest level in 14 years. That compares with the U.S. Dollar index’s gains of 0.4% and 8.2% so far this year and in 2022, respectively. The BOK said uncertainty was still high over how fast inflation would ease, citing core prices that were stickier in downward direction and delayed public utility price hikes.The real estate market remains overvalued, the central bank said, adding that a declining trend in house prices softened this year, with a rebound in mortgage loans on loosened regulations. More

The current account stood at 1.9 trillion yen ($13.58 billion) surplus in April, Ministry of Finance data showed on Thursday, beating economists’ median forecast for a surplus of 1.66 trillion yen in a Reuters poll.It followed a surplus of 2.3 trillion yen in the previous month, the data showed.A weak yen and rises in global interest rates helped drive up primary income gains from Japanese securities investments overseas, an MOF official said.That reflected the trend in which the country increasingly earns income from capital parked abroad rather than from sales of goods and services.The primary income surplus stood at 3 trillion yen, more than enough to offset the trade deficit of 113 billion yen, the data showed.Over the past year, the current account data often highlighted the pain that high energy costs and a weak yen were inflicting on Japan’s economy, the world’s third biggest, which relies heavily on imports of fuel and raw materials.Japan’s position as an export powerhouse has also waned in recent years, in part because companies have moved production overseas, making overseas investment a pillar of the country’s earning power.($1 = 139.9600 yen) More

MUMBAI (Reuters) – The Reserve Bank of India (RBI) is widely seen holding key rates steady on Thursday but commentary around the future trajectory of interest rates and banking system liquidity will be closely monitored by market participants.The monetary policy committee (MPC), which has three members from the RBI and three external members, is expected to leave the repo rate at 6.50% for a second straight meeting. All 64 economists polled by Reuters expect no change.The repo rate has been raised by a total 250 basis points since May last year to quell high inflation which has finally started showing signs of easing.Slowing inflation and a robust recovery in economic growth are seeing aiding the central bank’s decision to stay pat on rates but concerns around global growth slowdown and its resultant impact on the domestic economy will be a key concern.Radhika Rao, senior economist at DBS in Singapore said the decision on holding rates is likely to be unanimous, but the question of whether to maintain the current policy stance, which the RBI terms “withdrawal of accommodation”, could be more contentious. The doves on the committee would prefer to close the door on further tightening as inflation has been easing, she said. The monsoon season rains are just starting in India, and their impact on crops will be crucial to trends in food prices.”We expect the stance to be maintained this month as the MPC prefers to stay on wait-and-watch mode to gauge the fallout of weather conditions on the price trend before considering a pivot to easing,” Rao said.The commentary around domestic liquidity and the central bank’s liquidity management operations in recent weeks will also be a focus for bond market participants with inter-bank rates having shot up intermittently despite overall surplus cash in the banking system.Rao said they do not anticipate any significant change from the present course of action, which is to use temporary repo operations to provide support rather than longer lasting measures.Indian markets are unlikely to see much reaction if rates and stance is maintained, but a change in stance could fuel a bond and stock market rally while the rupee also could notch some gains.”It is unlikely that the RBI will precede the Fed in reversing its course of rate hikes,” said Madhavi Arora, lead economist at Emkay Global, while adding that it could soften its tone. More