Japan's September Rate Decision: Rate Hike Paused, in Line with Market Expectations

Remarks of Officials

Central Bank

Summary:

At the Monetary Policy Meeting held on September 20, the Bank of Japan decided, by a unanimous vote, to keep the overnight call rate unchanged at around 0.25 percent, which is in line with market expectations. The Bank of Japan indicates that inflation expectations have risen moderately, which is likely to be at a level that is generally consistent with the price stability target in the second half of FY2026.

At the Monetary Policy Meeting held on September 20, the Policy Board of the Bank of Japan decided, by a unanimous vote, to encourage the uncollateralized overnight call rate to remain at around 0.25 percent. The main content of the Statement on Monetary Policy is as follows:

Japan's economy has recovered moderately, although some weakness has been seen in part. The employment and income situation has improved. Private consumption has been on a moderately increasing trend despite the impact of price rises and other factors. Financial conditions have been accommodative. Japan's economy is likely to keep growing at a pace above its potential growth rate.

On the price front, the year-on-year rate of increase in the core consumer price index (CPI, all items less fresh food) has been in the range of 2.5-3.0 percent recently, as services prices have continued to rise moderately, reflecting factors such as wage increases, although the effects of a pass through to consumer prices of cost increases led by the past rise in import prices have waned. Inflation expectations have risen moderately.

While the effects of the pass-through to consumer prices of cost increases led by the past rise in import prices are expected to wane, the year-on-year rate of increase in the CPI (all items less fresh food) is 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, underlying CPI inflation is expected to increase gradually, since it is projected that the output gap will improve and that medium- to long-term inflation expectations will rise with a virtuous cycle between wages and prices continuing to intensify. In the second half of fiscal 2026, the CPI is likely to be at a level that is generally consistent with the price stability target.

Concerning risks to the outlook, there remain high uncertainties surrounding Japan's economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms' wage- and price-setting behavior. Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices.

Japan's September Rate Decision

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CAO

Economic

Data Interpretation

On September 20, Japan's Ministry of Internal Affairs and Communications published the CPI report for August:

The national CPI came in at a year-on-year rate of 3% in August, compared to the expected 3% and the previous reading of 2.8%.

The core CPI rose 2.8% from a year earlier in August, compared to the expected 2.8% and the previous reading of 2.7%.

The report indicates that the core CPI in August rose by 2.8% YoY, in line with market expectations but surpassing July's reading of 2.7%. This marks the fourth consecutive month of widening annual increases. The core inflation rate has now exceeded or met the BOJ's target of 2% for 29 months, indicating persistent inflationary pressures.

When breaking it down, the termination of the government-subsidized reductions for electricity and gas prices, implemented in January 2021, has led to a further increase in energy prices, which rose by 12.0% in August from a year ago. Electricity costs surged by 26.2%, the highest increase since March 1981, while gasoline prices fell by 3.8%.

Although there has been a slight uptick in dining out, the effect of increased travel on accommodation costs has weakened, with lodging expenses growing at a YoY rate of 9.5%, down from July's 10.3%. Food prices rose 2.9% from a year ago, an increase above July's 2.6%.

The rise in core prices in August may bolster the BOJ's confidence that inflation is being sustained amid rising wages, supporting underlying price trends.

Japan August CPI

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Justin

Economic

US officials now believe that a ceasefire deal between Israel and Palestinian Islamist group Hamas in Gaza is unlikely before President Joe Biden leaves office in January, the Wall Street Journal reported on Thursday.

The newspaper cited top-level officials in the White House, State Department and Pentagon without naming them. Those bodies did not immediately respond to requests for comment.

“I can tell you that we do not believe that deal is falling apart,” Pentagon spokesperson Sabrina Singh told reporters on Thursday before the report was published.

US Secretary of State Antony Blinken said two weeks ago that 90 percent of a ceasefire deal had been agreed upon.

The United States and mediators Qatar and Egypt have for months attempted to secure a ceasefire but have failed to bring Israel and Hamas to a final agreement.

Two obstacles have been especially difficult: Israel’s demand to keep forces in the Philadelphi corridor between Gaza and Egypt and the specifics of an exchange of Israeli hostages for Palestinian prisoners held by Israel.

The United States has said a Gaza ceasefire deal could lower tensions across the Middle East amid fears the conflict could widen.

Biden laid out a three-phase ceasefire proposal on May 31 that he said at the time Israel agreed to. As the talks hit obstacles, officials have for weeks said a new proposal would soon be presented.

The latest bloodshed in the decades-old Israeli-Palestinian conflict was triggered on Oct. 7 when Hamas attacked Israel, killing 1,200 and taking about 250 hostages, according to Israeli tallies.

Israel’s subsequent assault on the Hamas-governed enclave has killed over 41,000 Palestinians, according to the local health ministry, while displacing nearly the entire population of 2.3 million, causing a hunger crisis and leading to genocide allegations at the World Court that Israel denies.

Source: ARAB

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Pepperstone

Economic

Where We Stand –

It’s Friday, at the end of a long week, so I shall keep things brief this morning.

A distinct risk-on vibe dominated markets yesterday, as participants continued to digest the FOMC’s 50bp cut earlier in the week, with said cut providing a fillip to sentiment as the dust continued to settle. Such was the extent of the positive risk mood that the S&P 500 rallied almost 2%, notching its first record close since July, while the Nasdaq gained just shy of 3% on the day.

The path of least resistance continues to lead higher for the equity market, with the 3 pillars of my year-to-date bull case - strong economic growth, solid earnings growth, and the forceful Fed put - remaining in place. Dips should remain shallow, and continue to be viewed as buying opportunities. Plus, there are, of course, from a momentum perspective, few more bullish signals than a market closing at all-time highs.

In terms of catalysts away from the equity space, the BoE’s latest policy decision was yesterday’s standout event. The MPC kept Bank Rate unchanged, as expected, while also maintaining the pace of quantitative tightening at £100bln worth of gilts over the next year. Guidance was, unsurprisingly, a carbon copy of that issued last time around, with policymakers pledging to take a meeting by meeting approach to deciding the appropriate path of removing policy restriction. The GBP, however, was bid up post-BoE, as cable briefly rose north of the 1.33 figure to fresh highs since March 2022, likely as a result of the 8-1 vote split being marginally more hawkish than markets had expected.

The ‘Old Lady’s’ slow and steady approach to easing, with just one more 25bp cut in November likely this year, should underpin the GBP against most G10 peers for the time being, though one questions how long this relatively hawkish line can hold into 2025, particularly considering the impending significant fiscal tightening in October’s Budget.

Elsewhere, the weekly US jobless claims figures were considerably better than expected, with initial claims printing 219k in the week ending 14th September, a 4-month low, over the period coinciding with this month’s nonfarm payrolls survey week. I find it tough to square the idea of a 50bp cut, and 4.4% unemployment by year-end, with this sort of data, though only time will tell on that front.

In any case, the greenback was broadly softer on the day against all G10 peers, with the DXY sliding around 0.3%, not helped by a notable rally at the front-end of the Treasury curve, as 2s fell 3bp over the session. That said, the long-end of the curve continued to sell-off, resulting in a second straight day of bear steepening, as the 2s10s spread rose to fresh wides at 13bp.

Overnight, the Bank of Japan left all policy settings unchanged, with rates remaining at 0.25%, in what was a near non-event of a policy decision. Further tightening, however, remains on the table, with a December hike likely providing that the next set of forecasts, due in October, show the BoJ still being on track to achieve its inflation aim.

Look Ahead –

A quiet docket awaits today, which I imagine most participants will be rather pleased about.

The latest UK and Canadian retail sales figures are the data highlights – which says it all about how quiet things have the potential to be – with neither likely to materially move markets, or alter the respective central bank outlooks.

Besides those releases, the end of the Fed’s ‘blackout’ period sees non-voting member Harker make scheduled remarks, though other FOMC members could well pop up to voice their opinions throughout the day. ECB President Lagarde is also set to speak, though given that the day ends in a “y”, this shouldn’t come as any surprise.

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Owen Li

Forex

GBP/USD Price Forecast: Bulls retain control near 1.3300 mark, highest since March 2022

The GBP/USD pair trades with a positive bias for the third straight day on Friday and hovers around the 1.3300 mark during the Asian session, just below its highest level since March 2022 touched the previous day.

The British Pound (GBP) continues to draw support from the Bank of England's (BoE) decision on Thursday to keep interest rates unchanged and run down its stock of government bonds by another £100 billion over the coming 12 months. In contrast, the US Dollar (USD) languishes near its lowest level since July 2023 amid bets for more interest rate cuts by the Federal Reserve (Fed) and turns out to be a key factor acting as a tailwind for the GBP/USD pair.

GBP/USD tests 1.33 as Greenback weakness prevails

GBP/USD found a fresh 30-month high bid on Thursday, with a broad-market selloff in the US Dollar sparking a risk bid in Cable and bolstering the Pound Sterling. The Federal Reserve’s (Fed) 50 bps cut this week helped galvanized global markets into a risk-on stance, while the Bank of England’s (BoE) fearful rate hold did little to spark further strength under the GBP.

The only datapoint of note on Friday will be UK Retail Sales for August, though not much momentum is likely to come of it with investors exhausted after a double-header of central banks between the Fed and the BoE. UK MoM Retail Sales in August are expected to tick down to 0.4% from the previous 0.5%, while the annualized figure is expected to hold steady at 1.4%.

Source: FXSTREET

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Owen Li

Forex

Silver price (XAG/USD) extends its gains for the second successive day, trading around $31.10 per troy ounce on Friday. The non-yielding Silver receives support following the bumper 50 basis point rate cut by the US Federal Reserve (Fed) on Wednesday.

Additionally, increasing expectations for further rate cuts by the US Federal Reserve by the end of 2024 are putting pressure on Silver demand. The latest dot plot projections indicate a gradual easing cycle, with the median rate for 2024 revised down to 4.375% from the previous forecast of 5.125% in June.

As a non-yielding commodity asset, the precious metal becomes more appealing to investors in a lower interest rate environment, as the opportunity cost of holding it decreases. This can make Silver potentially offer better returns compared to other assets.

Meanwhile, the People’s Bank of China (PBoC) decided to keep its one-year Loan Prime Rate (LPR) unchanged at 3.35%, while the Bank of Japan (BoJ) maintained its interest rate at 0.15% on Friday. Additionally, on Thursday, the Bank of England (BoE) opted to hold its interest rate at 5%, as widely expected.

The safe-haven demand for Silver was bolstered by escalating tensions in the Middle East, as Israeli warplanes conducted their most intense strikes on southern Lebanon in nearly a year of conflict late Thursday. The White House stated that a diplomatic solution was both achievable and urgent, while Britain called for an immediate ceasefire between Israel and Hezbollah, according to Reuters.

Source: FXSTREET

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Alex

Economic

It was a great day for stocks, as the markets responded positively to the Fed’s interest rate cuts.

It was somewhat of a delayed reaction, as the markets seemed to take the Federal Reserve’s massive 50 basis point interest rate cut in stride on Wednesday afternoon. But after some time to digest the news, markets rallied on Thursday, with both the S&P 500 and Dow Jones Industrial Average touching record highs.

On Thursday, the Dow Jones Industrial Average was up 522 points, or 1.3%, rising above 42,000 points for the first time to 42,025. The S&P 500 also hit a record high, as it was up 95 points, or 1.7%, to an all-time high of 5,714.

The tech-heavy Nasdaq Composite had the biggest day, surging 441 points, or 2.5%, to break back over 18,000 for the first time since July, finishing the day at 18,014. The small cap Russell 2000 was also having a good day, rising 45 points, or 2.0%, to 2,251.

Tech stocks and banks lead the rally

The interest rate cuts sparked a rally across the board, but semiconductor stocks were the biggest gainers.

The largest chipmaker, NVIDIA (NASDAQ:NVDA), rose about 5% on the day to $119 per share, but AMD (NASDAQ:AMD) was the fastest mover, rising 6.6% to $158 per share. ASML Holding (NASDAQ:ASML), up 6%, GlobalFoundries (NASDAQ:GFS), up 5.8%, ON Semiconductor (NASDAQ:ON), up 5.6%, Marvell Technology (NASDAQ:MRVL), up 5.6%, and Broadcom (NASDAQ:AVGO), up 4.8%, were also some of the leading semiconductor stocks on Thursday.

In addition, banks were big movers on Thursday, which is a sign that investors are bullish on the economy. Bank stocks are typically bellwethers for economic growth, so the fact that investors were loading up on bank shares shows they feel good about the where the economy Is headed.

The KBW Bank Index was up 3% on Thursday, as large banks saw their prices. Bank of America (NYSE:BAC) stock jumped 3.4% Thursday, while Citigroup (NYSE:C) climbed 5%. Wells Fargo (NYSE:WFC) was also having a good day, up 3.1%, as was Goldman Sachs (NYSE:GS), up 4.2%.

“The Federal Reserve is embarking on what will likely be a series of rate cuts over a number of meetings over the balance of this year and next,” said Scott Wren, senior global market strategist at Wells Fargo, said. “We see a total of 175 basis points of cuts between now and year-end 2025. We anticipate that these Fed cuts should have a positive effect on the economy and markets in 2025. We believe the global economy is likely to benefit as well as major central banks around the world have already cut rates or are on the verge of doing so.”

Dividend stocks and small caps should benefit

Bank of America sees two more rate cuts in 2024, and that should provide a lift for stocks, said Chris Hyzy, chief investment officer for Merrill and Bank of America Private.

“When rates begin to fall, that has generally been positive for equities over the following 12 months,” Hyzy said. “Investors may also find potential opportunities in dividend-paying stocks, which have historically done well as rates decline.”

In the four previous rate cutting cycles, the top dividend beat the S&P 500 by 7.3% one year after the first cut, said Hyzy. The spread widens to 12% after three years, he added. Hyzy also sees opportunities in small cap stocks.

“Lower rates improve access to capital, and small companies have recently regained earning momentum after several disappointing years,” Hyzy said. He added that housing, automotive, and financials stocks should also benefit.

Source: FXSTREET

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