What to Watch Out for in the Global Economy?

The global economy is always subject to various factors and events that can significantly impact its performance. Staying informed about the latest developments and trends is essential for individuals and businesses alike. In this article, we will discuss some key areas to pay attention to in the global economy.

BOJ Likely to Change Policy in April

Many experts predict that the Bank of Japan (BOJ) could end its negative interest rate policy (NIRP) and make a policy shift as early as their March policy meeting next week.

Most analysts expect Japan’s first interest rate hike since 2007 to take place in April 2024. This decision follows wage increase negotiations, known as “shunto,” between labor unions and employers during the spring season. Goldman Sachs economists, led by Tomohiro Ota, wrote in a note, “We continue to expect BOJ to end NIRP in April. While a rate hike as early as March cannot be ruled out, it is probably not clear enough yet.”

By delaying the policy shift by a month, the BOJ can gather more data, explain their policy change through quarterly economic outlook reports, and avoid raising interest rates just before the end of the fiscal year when many financial institutions release their reports.

The BOJ updates its economic outlook four times a year in January, April, July, and October. The next policy meeting is scheduled for March 18-19.

Although core inflation, which excludes food and energy prices, has exceeded the 2% target for over a year, the BOJ has maintained its monetary policies since 2016.

At the December 19 policy meeting, the BOJ decided to maintain its ultra-loose monetary policy at -0.1% and apply yield curve control (YCC) by setting a cap on 10-year Japanese government bond yields at 1%.

Japan has been experimenting with various policy measures, such as asset purchases and quantitative easing, for decades to stimulate its fourth-largest economy and combat deflation.

Inflation and Economic Outlook

High inflation is dampening domestic demand and private consumption in Japan, highlighting the fragility of the country’s growth.

Private consumption, which accounts for about 60% of Japan’s economy, declined by 0.3% from October to December, surpassing the initial estimate of a 0.2% contraction. Additionally, external demand contributed about 0.2 percentage points to real GDP, unchanged from the initial estimate.

However, thanks to capital spending, Japan managed to avoid a technical recession. Capital spending increased by 2.0% from the previous quarter, rather than the estimated 0.1% decrease, but still fell short of the market’s average forecast of a 2.5% increase.

Anvarzadeh, a market strategist at Asymetic Advisor, commented, “Inflation in Japan is being assessed as low.” He emphasized that government subsidies, expected to end in April, have kept inflation low but warned that inflation would rise once they stop.

Market Repositioning

The recent comments from BOJ officials, the prevention of a technical recession, and hopes for strong wage increases have prompted market participants to start speculating and await the upcoming BOJ decision.

Some Bank of America economists also predicted that the BOJ would exit negative interest rates at the upcoming meeting instead of their previous forecast for April.

The recovery of Japanese stocks has stalled, and the yen has strengthened against the dollar, while 10-year Japanese government bond yields reached their highest level in three months on Tuesday.

BOJ Governor Ueda has taken a relatively more pessimistic tone on Japan’s economy compared to two months ago in his comments before the Japanese Parliament. Meanwhile, Finance Minister Shunichi Suzuki stated that Japan has not yet reached a stage where it can declare a successful defeat of deflation.

Anticipating Future Developments

Market participants are now looking beyond the timing of the BOJ’s exit from ultra-loose monetary policy.

After Governor Ueda’s press conference following the January monetary policy meeting, there have been indications that future interest rate hikes will be minimal.

Reuters reported that if the BOJ exits negative interest rates, it may also abandon the yield curve control policy. Instead, the central bank may increase its government bond purchases to avoid market disruptions.

Stay tuned with Business Today for updates on these crucial developments in the global economy.

References: CNBC