Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The Bank of Japan has held off on lifting negative interest rates, sending the yen lower as its governor said it was in no rush to change its policy before the US Federal Reserve considers cutting rates next year.At a news conference following the BoJ’s final meeting of 2023, governor Kazuo Ueda acknowledged that the prospect of achieving its inflation target had improved, but cautioned that the Japanese central bank was not ready yet to map out an exit from its ultra-loose monetary policy.The BoJ’s decision on Tuesday came after the Fed surprised markets last week by signalling that it would cut interest rates next year. That prompted warnings from the European Central Bank and the Bank of England that it was too soon for them to let down their guard against high inflation. The BoJ, which wants to ensure a lasting end to Japan’s decades of deflation, is the only major central bank to maintain interest rates below zero.“It is inappropriate to think that we will rush to change our policy because the Fed is likely to move within the next three to six months,” Ueda said, adding that he wanted to assess more data and conduct hearings with companies to confirm the virtuous cycle between wages and prices.The BoJ kept overnight interest rates at minus 0.1 per cent and made no change to its yield curve controls, after it revised the policy in October to allow yields on 10-year Japanese government bonds to rise above 1 per cent.  While some investors had expected the BoJ to change its forward guidance on rates or offer an indication of an imminent policy change, the central bank stuck to its dovish tone, pledging to stick with its easing measures “as long as it is necessary”. “For now, it is difficult to lay out with high certainty what kind of measures we will take during an exit,” Ueda said, adding that the BoJ would communicate its stance to investors once there was more clarity. The yen weakened 1.3 per cent on Tuesday to ¥144.67 against the dollar.An unwinding of the BoJ’s ultra-loose monetary policy could have major ramifications for international bond and currency markets, especially following the recent volatility in the yen. The Japanese currency is still down 9.5 per cent this year against the dollar, but has pulled back from a historic low of about ¥151 over the past month on expectations of policy tightening.“The move today [in the yen] is just a short-term reversal, this isn’t the start of a trend,” said Takashi Miwa, chief Japan economist at Nomura. He added that the Japanese currency would get a boost in the first half of next year when Nomura expects the BoJ to end its yield curve controls, “most likely in March or April”.Most economists had predicted that the BoJ would not make policy changes this week and would wait until there was more evidence of a persistent trend of wage rises. Japan’s core inflation has exceeded the BoJ’s 2 per cent target since April 2022, but prices are expected to come down next year.Earlier this month, BoJ governor Kazuo Ueda warned of an “even more challenging year” ahead for policy management, while deputy governor Ryozo Himino appeared to play down possible damage from raising interest rates in a recent speech. Both comments raised expectations the BoJ would soon stop holding interest rates below zero, sending the yen sharply higher. Nobuyasu Atago, a former BoJ official who is now chief economist at Ichiyoshi Securities, said that Ueda and Himino’s recent comments sent a clear message that they were considering policy change early next year. “This is a major turning point that a board member has discussed exit strategy,” Atago said, referring to Himino’s speech. “But it’s extremely challenging from here because the BoJ needs to be creative if it wants to offer signals to markets without raising expectations that it will continue raising rates.” Atago added that he expected the BoJ to lift its negative rate policy in January, but he said it was unlikely that the bank would raise interest rates consecutively considering the impact on regional banks and the JGB market. More

KYIV/LONDON (Reuters) – Ukraine’s embattled economy can weather the next few months until foreign aid arrives, but 2024 is certain to be tougher than this year and Kyiv will need to rely more heavily on its own resources.Ukraine hopes to plug next year’s $43 billion budget deficit mostly with foreign financial aid including 18.5 billion euros from the European Union and more than $8 billion from a U.S. package that also contains vital military assistance.Both packages have been blocked so far – by Republicans in the U.S. Congress and by Hungary in the European Union – but should eventually pass, though a question mark lingers over U.S. financial aid, economists and foreign diplomats said. Since Russia invaded in February 2022, Kyiv has ploughed all of its revenue into defence and the military, while spending on everything from pensions to social payments has been covered by tens of billions of dollars of foreign aid.Kyiv could fall several billion dollars short of its financing needs in 2024 but a $10 billion shortfall would create problems for macroeconomic stability and its International Monetary Fund programme, said Olena Bilan, Dragon Capital’s chief economist.The IMF – which approved a new $900 million tranche this month – requires firm financing assurances for the next 12 months, so a substantial decline in external financing could call its programme into question, she said.”The government has a liquidity reserve for January and February,” said Yurii Haidai, senior economist at the Centre for Economic Strategy, a think tank in Kyiv. Filling a gaping hole in the budget could force Ukraine to hike taxes, which would be counterproductive for the economy, or even print money for the budget, which would also come with risks, Dragon Capital’s Bilan told Reuters.Central Bank Governor Andriy Pyshnyi has made clear that printing money would be an extreme measure and one they do not plan to resort to this year.Ukraine also needs to find a way to restructure about $20 billion in international debt next year after sovereign bondholders agreed to a two-year payment freeze in August 2022.Finance Minister Serhiy Marchenko said the government hoped to secure foreign financing in full in 2024, but added that if the war lasted longer, then “the scenario will include the need to adapt to new conditions.”ECONOMY TO GROW BUT RISKS HIGHThe economy is on course to grow around 5% this year after contracting by almost a third last year. Inflation has fallen to single digits, foreign reserves are near historic highs and foreign aid has arrived regularly this year.Ukrainian businesses and foreign businesses have adapted to new wartime realities with some even announcing new production facilities in central and western regions, far from the fighting in the more heavily industrial east and south. Nestle invested 40 million Swiss francs (about $46 million) in a new facility in western Volyn region while German drugs-to-pesticides giant Bayer (OTC:BAYRY) planned to invest 60 million euros from 2023 onwards in corn seed production in central Zhytomyr region.But despite modest signs of recovery this year, the commodity-driven economy is still smaller than it was before the war, and risks and other constraints remain high. Millions of Ukrainians remain abroad after fleeing the invasion, prompting many businesses to complain about a shortage of workers, especially for highly skilled positions. The economy is also held back by Russian attempts to blockade the Black Sea, although a Ukrainian shipping route set up in defiance of Moscow this summer has helped commodities exports and may visibly boost growth next year, economists say. Uncertainty over the direction of the war persists, and logistics for exports remain disrupted with refugees still abroad. The National Institute of Agrarian Economics said transport and logistics problems led to a 7% year-on-year drop in agrarian product exports in November and pushed up imported food costs. Food accounts for 60% of Ukraine’s exports.The Kyiv-based ICU investment house sees growth easing to 5.0% in 2024 after 5.8% this year, with inflation expected to pick up next year. Dragon Capital expects GDP to grow by about 4% in 2024 after 5.2% this year.Kyiv is also certain to remain dependent on foreign financing despite concerns Western financial support might be waning, economists said. “We see the deficit (before foreign aid and loans) exceeding 10% of GDP at least until 2027, and going below 5% only beyond 2030,” ICU said in a research note.Ukraine’s trade deficit ballooned to $22.3 billion in the first 10 months of 2023, a record high that illustrated how imports were surging while exports remained weak. This month, Marchenko called on the public to cut consumption of imported goods in comments published by Ukraine’s LB.UA outlet. He said putting the economy on a war footing meant not only building up the military industry but also the public’s understanding of the situation. “This reality will need to be corrected if we want to go on a military footing. It is a limit on public consumption,” he said.”If we do not draw conclusions, the economy will draw them on its own – as a rule, quite quickly and painfully.” More

The euro zone’s second-biggest economy is on course to expand 0.8% in 2023, according to the Bank of France, which trimmed its 2023 forecast from 0.9% following weak third quarter data.The government is more optimistic and has based its budget planning on forecasts that pegged growth this year at 1% and next year at 1.4%.If growth turns out closer to the central bank’s forecast, the government may need to find extra savings in the budget to keep its deficit-reduction plans on track.The Bank of France said that as inflation slows and gives households purchasing power gains, consumer spending should recover over the course of 2024, pushing overall economic growth to 1.3% in 2025 and 1.6% in 2026.Marginally lowering its estimates, it forecast that inflation would slow from 5.7% on average this year to 2.5% next year and pass below the European Central Bank’s 2% in the first quarter of 2025.That means that wages were likely to grow faster than inflation from 2024-2025, helping support purchasing power gains and possibly tempting consumers to lower their currently high savings rates in favour of spending more. (This story has been corrected to change the forecast from 0.9% to 0.8% in paragraph 2) More

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SINGAPORE (Reuters) – Asian shares and the yen steadied early on Tuesday as traders’ focus turned on Japan’s central bank and whether it might edge further away from its ultra-easy monetary policy, while global equities continued to cheer the prospect of U.S. rate cuts. MSCI’s broadest index of Asia-Pacific shares outside Japan was flat and just below a four-month high. Oil held overnight gains after producer BP (NYSE:BP) followed other shipping firms and said it would avoid the Red Sea following recent attacks by Houthi forces. Several countries have agreed to joint patrols to try to safeguard commercial shipping.Japan’s Nikkei was flat. Nippon Steel shares fell more than 5% to a five-month low after it announced a $14.9 billion deal to buy 122-year old U.S. Steel.The yen hovered around its 200-day moving average at 142.53 per dollar. [FRX/]The Bank of Japan (BOJ) later on Tuesday will announce its latest policy decision amid speculation it is considering how and when to move away from negative interest rates. None of the analysts polled by Reuters expected a definitive move, but policymakers might start laying the groundwork for an eventual shift.April was favoured by 17 of 28 economists as the kick-off for negative rates to be scrapped, making the BOJ one of the few central banks in the world tightening.”While steady BOJ policy may be on the cards … the meeting may still be instrumental,” said Rabobank strategist Jane Foley in a note, as the central bank plots an eventual path to higher rates.”With the odds currently favouring further policy normalisation next year and given rate cut risks for other G10 central banks, the yen appears poised to have a better year in 2024,” she said, forecasting the dollar/yen pairing at 135 in a year’s time.Yields on Japanese government bonds rose very slightly in morning trade, tracking a modest lift in Treasury yields overnight. The 10-year yield had climbed 2.8 basis points after Federal Reserve Bank of Cleveland President Loretta Mester and Chicago Fed President Austan Goolsbee each pushed back at market bets on swift U.S. rate cuts next year.Equity markets mostly shrugged off the remarks, with the Dow Jones making a record high on Monday, while the S&P 500 drew nearer to the milestone. [.N]Traders reckon the slowdown in inflation means the Fed will have to ease policy just to stop real rates from rising, and are wagering on early and aggressive action.Interest rate futures markets price in more than 140 basis points of Fed cuts next year and were also unmoved by pushback last week from New York Fed President John Williams.Currency markets were broadly steady ahead of the BOJ decision. The dovish outlook for U.S. rates had dragged the dollar index down 1.3% last week, though similarly aggressive projections elsewhere are limiting further falls.Markets imply around 150 basis points of easing by the European Central Bank next year, and 114 basis points of cuts from the Bank of England.That kept the euro to $1.0921 and sterling to $1.2556. The Australian dollar lifted very slightly to $0.6714 after minutes showed policymakers had considered a second straight hike in December. [AUD/]Brent crude futures settled at $77.95 a barrel.[O/R]Bitcoin bounced from a one-week low to regain a footing above $42,000 on Tuesday. Beyond the BOJ decision, U.S. housing starts figures and Canadian inflation data are due later on Tuesday. More

But any signals from the central bank on when it plans to begin pivoting away from its ultra-dovish policy will be in close focus, especially amid growing expectation that 2024 will be the year that the BOJ ends its yield curve control (YCC) regime. Short-term rates are expected to be held around negative 0.1%, while the target for the benchmark 10-year bond yield is expected to remain at 0%.The BOJ had widened the range within which it allowed 10-year yields to fluctuate three times over the past 12 months- its first move to tighten policy since it began its YCC measures in 2016. While BOJ Governor Kazuo Ueda signaled an eventual end to the YCC policy in 2024, he also recently said that policy will remain loose in the near-term, citing the need for more support for the Japanese economy. Ueda had also signaled a “challenging” end to the year for the bank, briefly triggering a string of hawkish bets on the yen before officials said policy will remain loose for now. “Market participants will be seeking for further clarity at the upcoming meeting as to whether the comments may have been misunderstood. For now, broad market expectations are priced for Japan to scrap its negative rates only in the second quarter of 2024,” analysts at IG wrote in a recent note. A Reuters poll recently showed that a bulk of market participants are looking at a 2024 pivot, although the timing of such a move is seen later in the year, rather than earlier. Tuesday’s meeting- which is the last major central bank meeting for the year- is expected to offer more cues on plans for an exit from YCC, especially amid growing pressure on the BOJ to consider such a move.The BOJ was an outlier among major central banks this year, most of which raised interest rates and flagged tighter policy in the face of high inflation. But other central banks- particularly the Federal Reserve- are now set to begin loosening policy in 2024, amid some cooling in the global economy. Inflation has consistently overshot the BOJ’s 2% annual target for nearly two consecutive years, while 10-year bond yields have also tested their 1% upper limit in recent weeks. Still, weakness in Japan’s economy may keep the BOJ dovish for the time being. Recent data showed Japan’s economy shrank more than initially expected in the third quarter, following a short-lived boost from tourism. High inflation, laggard wage growth and a weak yen weighed heavily on consumer spending, which saw gross domestic product shrink 2.9% annually in the quarter. More

Minutes of its Dec. 5 Board meeting out on Tuesday showed the Reserve Bank of Australia (RBA) held the cash rate steady at 4.35% as data over the prior month did not radically change the economic outlook, and there was a risk unemployment could rise faster than forecast.Members now see “encouraging signs” of progress in inflation towards the bank’s target band of 2-3%, and this needed to continue. They also noted an accelerating pace of disinflation overseas, which could be emulated in Australia.”Members agreed there was sufficient value in waiting for further data to assess how the balance of risks was evolving and how best to balance these risks when setting policy,” the minutes showed. Whether further tightening would be required would depend on data and the evolving risks, it added.For December, the board agreed the risk it takes longer than expected to return inflation to target was balanced by the risk that aggregate demand slowed more quickly than expected.Consumer price inflation ran at 5.4% in the third quarter, down from a peak near 8% but still far above the RBA’s target range of 2-3%.The central bank had in November hiked rates by a quarter point amid worries inflation expectations could become un-moored. It has jacked up interest rates by a whopping 425 basis points since May last year. Markets have since moved to price out any further hikes, in part due to a recent dovish turn from the Federal Reserve.Futures imply just a 5% chance of a rate rise at the next RBA meeting in February, and two quarter-point cuts by the end of next year.The Board did note inflation was expected to be above target until late 2025, and then only slow to the top of the 2-3% range rather than the midpoint. Australia’s economy barely grew in the third quarter as exports flagged and households cut back spending, suggesting rate hikes were working to restrain demand. Jobless rate also hit a 1-1/2 year high of 3.9% in November. Members also agreed the RBA’s current approach of holding government bonds to maturity remained appropriate, but agreed to keep under active consideration the possibility of selling the bonds earlier.The board discussed whether it would to best to sell the bonds to the market or directly to the government, and saw several benefits of choosing the latter course. More