BoJ Deputy Governor Ryozo Himino, in a speech today, affirmed the central bank’s commitment to continued monetary easing. He noted, “the Bank will patiently continue with monetary easing until sustainable and stable achievement of the price stability target, accompanied by wage increases, comes in sight.”
He acknowledged the positive changes in firms’ wage- and price-setting behavior, noting “solid progress” and “signs in the right direction.” However, he warned of the risks of reverting to a deflationary state if a virtuous cycle between wages and prices is not established.
Explaining further, Himino commented on the longstanding norm in Japan where neither wages nor prices could rise significantly. “Japan had worked for many years to break free from this,” he added, “and simply returning to such a frozen state after the current high inflation comes down would not be a desirable outcome either.”
Himino highlighted the longstanding norm in Japan where “neither wages nor prices could rise”. He stressed that Japan’s efforts to break free from this stagnation, adding, “simply returning to such a frozen state after the current high inflation comes down would not be a desirable outcome”.
He also outlined the multiple challenges facing Japanese monetary policy, including addressing current inflation, supporting moderate economic recovery, encouraging wage increases, and preventing a return to deflation. “The Bank is struggling to find a solution and this is by no means an easy task,” he admitted.
BoC set to stand pat, will dovish shift follow?
BoC is widely expected to hold overnight rate target steady at 5.00% today, amidst a backdrop of increasing economic challenges. Current market climate suggests the potential for a slightly dovish shift in the central bank’s statement. However, while there is speculation among some investors about the possibility of BoC commencing rate cuts as early as the second quarter of next year, it seems premature for the central bank to signal any definite intentions in this regard at the current juncture.
Governor Tiff Macklem’s recent comments have significantly influenced market expectations. He noted that “the excess demand in the economy that made it too easy to raise prices is now gone” and the economy is “approaching balance”. His observation that softening economic activity will exert “more downward pressure on inflation” and the acknowledgment that “interest rates may now be restrictive enough” have nearly eliminated the odds of further rate hikes.
In a recent Reuters poll, a majority of economists, specifically 18 out of 26, projected that BoC’s rate would decrease to 4.0% or lower by the end of 2024. Nevertheless, Macklem is expected to reiterate that discussions about rate cuts are still premature, indicating a cautious approach from the central bank in the face of uncertain economic conditions.
CAD/JPY has been bounded in range trading below 111.14 since September. The pull back is so far rather shallow as contained by 23.6% retracement of 94.04 to 111.14 at 107.10. There is not sign of trend reversal, and another rise through 111.14 is still in favor. However, considering bearish divergence condition in D MACD, upside potential could be relatively limited.
On the other hand, firm break of 107.10 could indicate that deeper decline is underway to 38.2% retracement of 104.60, or even further to 61.8% retracement at 100.57. However, such a significant decline would likely require concurrent dovish policy shifts from BoC and hawkish turn from BoJ, potentially materializing early in the next year.