BOJ July Monetary Policy Meeting Minutes: Upside Risks to Prices Required Attention

Remarks of Officials

Central Bank

Summary:

According to the minutes of the July monetary policy meeting released by the Bank of Japan (BOJ) on Thursday, Policy Board members called for an appropriate increase in interest rates. Many members shared the recognition that upside risks to prices required attention in conducting monetary policy. Some members expressed the view that it was appropriate to start gradually adjusting the significantly low policy interest rate at this stage, in order to prevent rapid policy interest rate hikes necessary at a later time.

On September 26, the Bank of Japan released the minutes of its July monetary policy meeting, and the main content is as follows:

Japan's economy had recovered moderately, although some weakness had been seen in part. Regarding the outlook, it was likely to keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately against the background of factors such as accommodative financial conditions.

The employment and income situation had improved moderately. Nominal wages per employee had increased clearly, reflecting the recovery in economic activity and the results of the 2024 annual spring labor-management wage negotiations. With regard to the outlook, nominal employee income was likely to continue to see a clear increase in reflection of an acceleration in nominal wage growth.

As services prices continued to rise moderately, inflation expectations had risen slightly. While the effects of the pass-through to consumer prices of cost increases led by the past rise in import prices were expected to wane, the rate of increase was projected to be pushed up through fiscal 2025 by factors such as a dissipation of the effects of the government's measures pushing down CPI inflation.

Meanwhile, it was projected that the output gap would improve and that medium- to long-term inflation expectations would rise with a virtuous cycle between wages and prices continuing to intensify. The year-on-year rate of increase in the CPI (all items less fresh food) was likely to be at around 2.5 percent for fiscal 2024 and then be at around 2 percent for fiscal 2025 and 2026.

Many members shared the recognition that, upside risks to prices required attention in conducting monetary policy. On this basis, many members shared the recognition that real interest rates were expected to remain significantly negative even if the Bank raised the policy interest rate slightly, and accommodative financial conditions would continue to support economic activity. Some members expressed the view that it was appropriate to start gradually adjusting the significantly low policy interest rate at this stage, in order to prevent rapid policy interest rate hikes necessary at a later time.

Given the current environment surrounding prices, it might be time to consider raising the policy interest rate slightly, if the outlook for economic activity and prices materialized.

BOJ July Monetary Policy Meeting Minutes

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Owen Li

Economic

The Bank of Japan (BoJ) board members shared their views on the monetary policy outlook on Thursday, per the BoJ Minutes of the July meeting.

Key quotes

Members shared a view over the need for vigilance to the risk of inflation overshoot.Many members said it was appropriate to raise rates to 0.25%, adjusting the degree of monetary support.

A few members said it was appropriate to adjust the degree of monetary support moderately.

One member said economic conditions were good enough to somewhat push up the current very low policy rate.

One member said they must be vigilant to the impact of rising inflation, driven in part by the weak yen, on household sentiment and small firms' costs.

A few members said it was appropriate to gradually adjust very low rates now to avoid being forced to hike rates rapidly later.

One member said the BOJ must adjust the degree of monetary support further if the strength of capital expenditure and wage growth could be confirmed.

One member said they must carefully look at various risks in proceeding with monetary normalisation.

One member said BOJ must avoid creating too much market expectation of future rate hikes as inflation expectations have yet to be anchored at 2%

One member said it was difficult to move rates mechanically as there was high uncertainty on Japan's neutral rate.

One member said it was difficult to move rates mechanically as there was high uncertainty on Japan's neutral rate level

Cabinet minister representative said must be vigilant to impact of weak yen, rising inflation on households' purchasing power, downside risks to overseas economies

Source: FXSTREET

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Alex

Economic

Malaysia is now more selective in choosing foreign direct investment, with a focus on projects that would greatly benefit the country, especially in the field of artificial intelligence (AI) and data technology, said Prime Minister Datuk Seri Anwar Ibrahim.

He said the opening of a data centre that used to depend on cheap energy and water to move and cool the operating system is now no longer sufficient.

"Now, if you want to [establish] a data centre, you must have AI,” he said, referring to projects like Nvidia's in Johor, “which is an example of how technology needs to be improved to remain relevant," he said at the Ilmuan Malaysia Madani Forum here on Wednesday organised by Tenaga Nasional Bhd .

Anwar said universities in this country should also be empowered to produce a skilled workforce in the field of AI and engineering in order to meet the needs of high-tech investors.

"If the investment is big...we are now more selective in choosing the ones that can benefit the country more," he explained.

Meanwhile, touching on Budget 2025 to be tabled in Parliament on Oct 18, Anwar outlined education and health as the main priorities, with the highest allocation given to the education sector, followed by health.

Source: Theedgemarkets

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Cohen

Economic

The government needs to take practical measures, including targeted diesel subsidies despite receiving criticisms, said Prime Minister Datuk Seri Anwar Ibrahim.

He said targeted diesel subsidies had successfully increased investor confidence, stock market stability, and strengthened the implementation of the country's Fiscal Responsibility Act.

"This step has had a positive impact on the market. After we implemented targeted diesel subsidies, the price of diesel dropped by 40 sen. This gives confidence to investors, and shows our commitment to stronger economic reforms," he said at the Ilmuan Malaysia Madani Forum here on Wednesday.

Anwar explained that the implementation of subsidies that are not properly targeted would burden the country's finances, especially when the subsidies are also enjoyed by the rich, who should be able to cover the higher costs. "Rich people who can afford to pay RM100,000 for their child's education in a private university but cannot afford to pay RM10,000 in a public university — that is something we need to change. It's the same in government hospitals, where they (rich people) enjoy first-class facilities with minimal fees," he said.

He also compared the situation to the failure of the National Health Service in the UK, where massive subsidies to all levels of society eventually became unsustainable.

"Malaysia has the lowest tax base in Asia, and this becomes a big challenge when the government has to make practical decisions in implementing reforms, including subsidies," he added.

Source: Theedgemarkets

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Citibank

Economic

Central Bank

The Fed chose to end the monumental suspense over “25 or 50” basis points for its first rate cut of the easing cycle with the more decisive action. Wisely, it chose not to make us wait all year for a “meager 25.”

Whatever the Fed’s decision, further declines in US policy rates have always been just a matter of time. Is the Fed uncertainty all out of the way now? The Fed’s decisiveness actually left markets less clear in some respects. Short-term fixed income markets are now roughly split 50/50 on the chance of 25 or 50 basis point rate cuts at both the November and December FOMC meetings. The “25 or 50” agony will continue.

By the end of next year, fixed income markets now price cuts in the Fed funds rate from a peak of 5.5% all the way down to 3.0% (this represents the “top end” of the Fed’s target range).

Of course, Treasury yields could still move lower, particularly when equities and credit markets weaken. This is why we believe investors should consider allocating at least a portion of their investment portfolio to Treasury securities as a core holding to provide some “ballast” should the economy unexpectedly weaken.

Portfolio considerations

Fixed income investors need to shift their focus to wisely managing credit risks. There are standout yields still available across the risk spectrum ranging from government-backed mortgage securities to high yield loans. We believe diversified portfolios should not exclude US Treasuries even as yields have moved decisively lower. But Treasury Bills in isolation are not a portfolio.

Fed Easing Changes the Game for Fixed Income Investors_1

Fed Policy Rate Likely to Fall to 3.4% by end-2025

As it seeks to engineer a full normalization and “soft landing” of the US economy, this past Wednesday the FOMC cut the Fed Funds rate by 50bps, taking the rate down to 5%. This was the first rate cut since the pandemic shock of 2020. The FOMC also published its “dot plot,” an estimate of where the Fed thinks the Fed Funds rate might be in the next few years. While this dot plot often proves inaccurate, it does provide a window into the Fed’s current expectations. For now, the Fed is indicating the possibility of six more 25bps rate cuts through the end of 2025, down to a top Fed Funds rate of 3.50%. In 2026, the Fed indicates the possibility of another few cuts, down to about 3%. Futures markets are slightly more aggressive on the pace of Fed rate cuts but not really the depth. The market currently prices nearly 2% of cuts down to 3% in 2025, with perhaps one more cut after that to 2.75% in 2026.

When looking at both the Fed’s dot pot and the futures market, they both coalesce around an ultimate “neutral rate” of about 2.75-3% for Fed Funds at some point in late 2025 or early 2026. The US Treasury market has already priced in much of this potential shift in yields lower, so since the time of the Fed’s previous dot plot back in mid-June, the yield curve has declined considerably. Most of the decline has occurred in the “intermediate” portion of the yield curve (2-7 years), an area we have long favored for investors. The 2y yield, for example, has declined by more than 100bps, while 5y yields have declined almost 80bps and the 10y has dropped by about 50bps.

A US Recession May Impact Rates Further

Of course, the more important question for most investors is what the Fed will achieve. The Fed’s growth and inflation forecasts are steady and have barely changed. In line with updates to data since June, the unemployment rate forecast is a tad higher. But the Fed has roughly doubled the speed of its expected rate cuts. This is far closer to bond market pricing than the Fed’s previous forecast and closer to historic experience.

While we indeed expect the US labor market to continue slowing, it’s most notable that output data continue to remain firm. On a year/year basis, US real GDP growth exceeded 3% in 1H 2024 and tracking data suggest a roughly 2.5% pace this quarter. Strong labor markets didn’t mean strong corporate profits in 2023. Similarly, a slower labor market hasn’t inhibited a broadening profits recovery in 2024.

O/Ws Continue for Equities

Meanwhile, US policy is a critical question for the world. As this past week showed, the Fed has moved decisively in a more friendly direction for global asset prices. Foreign policy, US fiscal policy, and tariff policy could be a different story. There, the question is “how disruptive might US policy be?”

These questions weighed on our Global Investment Committee as we held our allocations steady this week. We maintained overweights in equities centered in US “broadening strategies” aimed at softening tech concentration risk. In the long run, we will need to carefully assess any changes in the drivers of US outperformance, which has been profound in the past 15 years. Potential policies of the upcoming US administration could potentially shock, strengthen, or weaken that trend.

We’ve also maintained overweights in US bonds while underweighting global bonds given the US yield advantage. Even so, the declines in US Treasury yields across all maturities represents a new investor challenge. It requires us to focus on segments of the bond market where yields have remained high on a risk-adjusted basis.

But we think investors may benefit from differentiated types of credit in the core fixed income portion of their investment portfolio (depending on their knowledge of the products, their risk tolerance, and other suitability factors). Based on our view that real GDP growth this year and next will be around 2.4%, we estimate that credit spreads – the return one can earn over Treasury yields – will remain relatively range-bound.

We believe investors should therefore consider intermediate maturity investment grade corporate bonds as a core fixed income holding. Credit spreads remain very tight, declining from about 150bps a year ago to about 80bps currently. While this spread is not particularly high relative to historical levels, it is still incremental yield in addition to Treasury yields and should provide some additional income.

To stay updated on all economic events of today, please check out our Economic calendar

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FED

Remarks of Officials

Central Bank

On September 25, Fed governor Adriana Kugler expressed her latest opinions regarding inflation and the labor market:

Inflation based on personal consumption expenditures (PCE) has come down from a peak of 7.1 percent on a year-on-year basis to 2.5 percent in July. Core PCE inflation has come down from a peak of 5.6 percent to now 2.6 percent. Headline PCE and core PCE inflation are expected to be at about 2.2 and 2.7 percent, respectively, in August, consistent with ongoing progress toward the FOMC's 2 percent target.

Goods inflation has reverted to its longer-term pattern as demand has moderated and supply chain problems have abated. Food and energy inflation has moderated over the past two years and are now both running at 12-month rates of 1.4 percent and 1.9 percent, respectively. Housing services price moderated to a 5.3 percent pace in July. But now inflation for services excluding housing is declining, after a temporary escalation in the first quarter of this year that was likely partly due to residual seasonality. To sum up, inflation has broadly moderated as the supply of goods and services has improved, and as producers and consumers have adjusted to the effects of higher prices.

The labor market showed signs of cooling. As a result of improved supply and easing of demand for workers, the labor market has rebalanced. After running at very low levels, unemployment has edged up this year to 4.2 percent in August, still quite low by historical standards. Job creation stands at an average of 116,000 in the three months ending in August, and the ratio of job vacancies to the number of people looking for work has also fallen close to its pre-pandemic ratio.

The combination of significant ongoing progress in reducing inflation and a cooling in the labor market means that the time has come to begin easing monetary policy, while the discussion of labor markets has recently become a greater focus of monetary policy. It is essential to avoid unnecessary pain and weakness in the economy as disinflation continues in the right trajectory. I strongly supported last week's decision and, if progress on inflation continues as I expect, I will support additional cuts in the federal funds rate going forward.

Kugler's Speech

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[Quick Facts]

1. Kugler backs further rate cuts if inflation continues to ease as expected.

2. US new home sales decline in August alongside falling house prices.

3. BOJ July meeting minutes note vigilance over upside risks to inflation.

4. US Congress passes stopgap funding bill, averting a government shutdown.

[News Details]

Kugler backs further rate cuts if inflation continues to ease as expected

In Wednesday's address, Federal Reserve Board Member Kugler expressed staunch support for the Fed's decision to cut rates by 50 basis points, underscoring concern for the job market. It is now appropriate for the Fed to focus on employment given signs of cooling yet resilient labor conditions. The FOMC must balance concerns to advance in taming inflation without causing undue hardship or weakening the economy. Should inflation progress as anticipated, Kugler would back extra rate decreases.

US new home sales decline in August alongside falling house prices

Data released by the US Department of Commerce revealed that annualized new home sales in August reached 716,000 units, above the predicted 700,000, but lower than July's 739,000. New home sales dropped by 4.7% month-on-month following a 10.6% gain in July. Median house prices declined 4.6% YoY to $420,600, marking the seventh consecutive monthly decline. Post a significant increase in July, August's drop in new home sales reflects buyers' patience amid declining mortgage rates despite warming market sentiment.

BOJ July meeting minutes note vigilance over upside risks to inflation

July's Bank of Japan (BOJ) policy meeting minutes indicated BOJ policymakers advocating gradual, timely interest rate hikes. Members unanimously agreed to stay alert to the risk of inflation exceeding forecasts. Several noted an upward adjustment to reach 0.25%, tempering monetary accommodation, was fitting. Some suggested phasing out extremely low rates incrementally to avoid abrupt future rate hikes.

US Congress passes stopgap funding bill, averting a government shutdown

Congress approved a stopgap spending bill on Wednesday to prevent a partial federal shutdown due next week, despite grievances from many House Republicans about leadership failing to negotiate fresh federal budget cuts.

Extending current discretionary spending levels of roughly $1.2 trillion annually until December 20th, the bill avoids mandatory furloughs for thousands of federal workers. It averts disruption of major government services weeks before the November 5th election.

Numerous House Republicans defied their leaders, voting against the stopgap measure, reflecting President Trump's earlier endorsement of a government shutdown unless controversial provisions banning non-citizens from federal election voting, already illegal, were attached to the spending bill.

[Today's Focus]

UTC+8 15:30 SNB Interest Rate Decision (Sept)

UTC+8 16:00 SNB Chairman Jordan's Press Conference

UTC+8 20:30 US Durable Goods Orders Prelim (Aug)

UTC+8 21:20 Fed Chair Powell Delivers Pre-recorded Video Remarks at Event Kickoff

UTC+8 21:25 Remarks by NY Fed President Williams

UTC+8 21:30 ECB President Lagarde, Vice-President Guindos, and Supervisory Board Chair Buch Speak

UTC+8 22:00 US Existing Home Sales (SA) (Aug)

22:30 Speech by Fed Governor Barr

01:00 Next Day: Fireside Chat Between Minneapolis Fed President Kashkari and Fed Governor Barr

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