Key Takeaways
- Bank of Japan (BOJ) members hold varied views on the inflation outlook, with one estimating underlying inflation between 1.5% and 2.5% and inflation expectations steadily approaching the 2% target.
- Discussions within the BOJ minutes indicate a readiness to adjust monetary support and potentially hike rates if inflation persists above 2%, with some members advocating for timely action and moving the policy rate closer to neutral.
- While some BOJ members see a limited direct impact of US tariffs on Japan's economy, there's a strong emphasis on scrutinizing potential intensification of negative effects on exports, output, smaller firms, and future wage negotiations.
- Globally, the G7 and EU are exploring rare-earth price floors and other measures to counter China's dominance in supply chains, while Australia's S&P/ASX 200 Index saw a decline in early trade.
The Bank of Japan's (BOJ) latest Monetary Policy Meeting minutes reveal a nuanced internal debate on the nation's inflation trajectory and the appropriate path for monetary policy. One member estimated underlying inflation in Japan is likely between 1.5% and 2.5%, noting that inflation expectations, while not yet anchored at 2%, are steadily approaching that level. However, another member observed that the pass-through of higher wages to service prices is proceeding slowly and shows no sign of acceleration. Conversely, some companies are reportedly gaining confidence to pass on costs through price hikes as consumers' inflation expectations shift.
Recent data showed Japan's core consumer prices advanced 2.7% in August from a year earlier, easing to the slowest rise in nine months, cooling from 3.1% in July. A more narrowly defined index, excluding fresh food and energy, increased 3.3% in August, down from 3.4% in July, but still above the BOJ's 2.0% target for the 41st consecutive month. Japan's Producer Price Index (PPI) Services year-over-year for August came in at 2.7%, below estimates of 2.9% and the previous 2.9%.
Regarding monetary policy, the minutes highlighted diverse opinions on future adjustments. Some members emphasized the need to carefully assess whether fiscal policy could contribute to higher inflation. There was a call for the BOJ to adjust monetary support timely if inflation remains above 2% for a prolonged period, with one member stressing the importance of hiking rates at an appropriate timing from a risk management perspective. Another member suggested the BOJ should raise rates when possible, as the policy rate is below neutral, advising against being overly cautious and missing an opportunity to hike. Members expect the BOJ to continue raising rates if the economy and prices align with forecasts. The BOJ kept its benchmark rate unchanged at 0.50% last week, but two board members dissented, favoring a 25-basis-point hike to 0.75%. Markets are now pricing in a roughly 50% chance of a rate hike at the BOJ's next policy meeting on October 29-30.
The potential impact of US tariff policy on Japan's economy was a significant point of discussion. While some members suggested the direct impact might be limited or not significant, others were mindful that the negative effects on Japan's exports and output could intensify. Several members emphasized the need to scrutinize how profit declines among big manufacturers could affect smaller firms and next year's wage negotiations. The Japanese government had previously cautioned about the negative effects of US tariffs, even after a trade agreement lowered the tariff rate from what was initially threatened. The automotive sector, in particular, has faced a severe blow, with top automakers looking at a projected ¥2.6 trillion impact on their operating profit for fiscal year 2025. Despite a reduction in tariffs on Japanese cars and auto parts to 15% from 25%, the burden on Japanese automakers remains heavy.
In other global economic news, the G7 and European Union are exploring measures to strengthen local supply chains and counter China's dominance in rare-earth elements. These measures include considering price floors, export taxes, and carbon-based tariffs, following Beijing’s export curbs in April that disrupted European markets. China currently dominates 60-70% of global rare earth mining and over 80% of refining capacity.
Meanwhile, Australia's S&P/ASX 200 Index (XJO) was down 0.2% at 8,746.90 in early trade. The index had previously dropped 0.9% to finish at 8,765 on Wednesday, snapping a three-session winning streak, after a larger-than-expected rise in August consumer prices led markets to scale back bets of near-term rate cuts.
Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications.