[Tokyo 23rd]- There is severe adjustment pressure on Japanese and US stock prices. This is because the much-anticipated start of interest rate cuts by the US Federal Reserve (Fed) is likely to be delayed from June, as originally expected by the market.
The flip side of the strong US economy is that the Consumer Price Index (CPI) has not declined from the 3% level to 2% compared to the previous year. The effects of monetary tightening are slow to spread to a reduction in upward pressure on prices, which remain high. U.S. long-term interest rates have also continued to rise gradually, as expectations for interest rate cuts within this year have faded. This is putting pressure on the dollar.
The Bank of Japan also appears to be gradually being forced to revise its previous announcement that accommodative financial conditions will be maintained for the time being. This is because the pressure on the yen to depreciate is stronger than expected. At a lecture held in Washington on April 19, Governor Kazuo Ueda said, “If the underlying trend in prices continues to rise, there is a very high possibility that we will raise interest rates.” In order to check the excessive depreciation of the yen, it appears that the government is shifting its focus to a more hawkish position than before.
The contrast between the Federal Reserve pushing back policy changes and the Bank of Japan bringing them forward has come as a shock to investors.
When the Bank of Japan decided to end negative interest rates on March 19, it tried to give the market a sense of security by saying there would be a considerable interval before the next additional rate hike in order to curb the rise in long-term interest rates.
The content of that announcement is likely to change depending on the future situation. In the current situation, the effects of a weaker yen will push up import prices, which will then spill over into the CPI. According to my calculations, if the dollar/yen exchange rate were to depreciate by 10% compared to the previous year, it would have a significant impact on the core CPI (excluding fresh food) by +0.62 percentage points.
Since around January 2024, the yen has been depreciating at a pace of slightly more than 10% compared to the previous year. There will be a time lag of three to four months for this to spread to prices. In other words, calculations suggest that the core CPI will rise due to the weaker yen from around May 2024. The national CPI for May will be announced after mid-June. Therefore, it would not be surprising if the core CPI is 3% compared to the previous year.
The rise in electricity and gas prices also has an effect on the core CPI. The electricity bill has already been decided.
We expect that revisions to the renewable energy levy will make a major contribution. Additionally, the halving and abolition of price subsidies from January 2023 will come into effect in May and June. Adding these factors together, a simple calculation suggests that the core CPI around July will be pushed up by about 1.4 percentage points compared to the most recent March result (2.6%). Based on the release date of the CPI, it is likely that the data for July-August will be the period when there will be a noticeable upward trend.
In terms of changes in fundamentals, a fixed tax reduction will be added to the payment of summer bonuses in June. This will probably start to show up in consumption data around July-August. The timing of the “summer surge” is precisely when the upward pressure on prices is increasing.
From the Bank of Japan’s perspective, it would have wanted to raise interest rates further after seeing such summer data.
Up until now, the author has only raised the policy interest rate from 0.10% to 0.25% at the monetary policy meeting at the end of October, after the core CPI reached a sufficiently high growth rate from May to August. I expected that. However, that schedule is likely to be moved forward somewhat.
Actually, this part is quite difficult to read. If the date is moved forward from October 31st, the possible dates would be September 20th or July 31st. Looking at other dates, the Liberal Democratic Party presidential election is scheduled for the end of September. It would be strange for Governor Ueda to raise interest rates just before a major political event.
However, data on price increases is not available for July 31st. Moreover, it seems too early to lift negative interest rates on March 19th and the next rate hike will be on July 31st.
A tricky idea is to hold an extraordinary meeting in August. However, it is difficult to explain why it was necessary to hold the event on a temporary basis in August.
Many people say that the Bank of Japan’s additional interest rate hike is likely to be brought forward, but when you think about it more deeply and consider the likely timeline, it becomes quite a headache.
In terms of the depth of its troubles, the Federal Reserve is not far behind. Previously, we had predicted that the Federal Open Market Committee (FOMC) would revise the federal funds rate downward to 5.25% to 5.50% on June 12th. However, now there is no discomfort at all even if there is a delay of several months.
The author believes that the US presidential election on November 5th will be the main factor behind the Fed’s interest rate cuts this year. What is really troubling is that the election results will not be known immediately, and there is a risk that the election will be delayed until December and even January next year.
In the meantime, the Federal Reserve will continue to steadily lower interest rates. The dates for this year’s FOMC (second day) will be July 31st, September 18th, November 7th, and December 18th. If the FOMC’s interest rate cut in June is postponed, when will the next one be?
I believe that in September, when the outlook for policy interest rates will be announced, the Bank will announce the start of interest rate reductions, indicating that it will cut interest rates twice this year (probably in September and December).
Both Biden and Trump, who are certain to be their party’s nominees for the presidential election, have the opportunity to appeal to lower interest rates by the end of the year before the election. Since there is a time lag for policy effects, I think he will explain that the effect of pushing up the growth rate can be expected from the beginning of 2025. Mr. Trump, who has taken a tough stance against Chairman Powell, will likely have no choice but to accept the announcement that interest rate cuts will begin in September.
Suppose the Bank of Japan decides to raise interest rates further in July. This would put the timing earlier than the Fed’s September interest rate cut. How will the dollar/yen rate react to this?
I predict that the announcement “at a slow pace” will be less effective when it comes to the next additional interest rate hike. This is because the move to raise interest rates again in July after March is no longer at a “slow pace.” In that case, the impact of an additional interest rate hike on the yen’s appreciation will be greater.
As of July, there is still no indication that the Fed will start cutting interest rates. The prospect that the U.S. economy will be supported by lower interest rates is also unlikely to hold true. The author believes that the yen will be moving toward a stronger yen in July, as the pressure to weaken the dollar smolders.
Even if Governor Ueda decides to raise interest rates further, he will want to avoid the risk of an extremely strong yen. However, if the Bank chooses to raise interest rates in July, the pressure on the yen to appreciate is expected to be stronger than if it chooses to raise rates in September. Now, will Ueda BOJ pick up the “chestnuts in the fire”?
Editing: Erika Mune, Kazuhiko Tamaki
(This column was posted on the Reuters Foreign Exchange Forum. It is written based on the author’s personal views)
*Hideo Kumano is chief economist at Dai-ichi Life Economic Research Institute. Joined the Bank of Japan in 1990. He retired in July 2000 after working in the Research and Statistics Bureau and the Information Services Bureau. In August of the same year, he joined the Dai-ichi Life Research Institute. Current position since April 2011.
*The content such as news, trading prices, data and other information in this document is provided by the columnist for your personal use only and is not provided for commercial purposes. there is no. The content of this document is not intended to solicit or induce any investment activity, and it is not appropriate to use this content for the purpose of making decisions regarding trading or buying or selling. This content does not provide any investment, tax, legal, etc. advice that constitutes investment advice, nor does it make any recommendations regarding specific financial stocks, financial investments, or financial products. Use of this document is not intended to replace investment advice from a qualified investment professional. Although Reuters makes reasonable efforts to ensure the reliability of content, any views or opinions provided by columnists are their own and not those of Reuters.
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