Bank of Japan may shift policy focus to rates as monetary firepower wanes
Sources familiar with its thinking say the board may consider deepening negative rates to show its determination to maintain an ultra-easy policy bias, though analysts doubt whether that will do much to boost growth.
The BOJ is also keen to dispel market concerns it is running out of ammunition to prevent unwelcome yen rises from hurting Japan's exports. The dollar may weaken against the yen if the Fed sends out a dovish message on its future rate hike path at its policy announcement due hours after the BOJ's, analysts say.
"The BOJ insists that it still has many tools available. But the costs of using these tools are rising and the benefits are diminishing, especially for its huge asset purchases," said Izuru Kato, chief economist at Totan Research.
"Deepening negative rates has enormous costs too but practically, that's probably the only usable tool left."
For Yellen, a September Fed surprise could close confidence gap
Market volatility is low, U.S. census data shows income gains have reached the middle class, and workers are clawing back a larger share of national income. For now, at least, no international risk stands out and inflation may even be picking up.
If Fed Chair Janet Yellen wants to prove that policymakers are not being pulled along by investors who for years have second-guessed them, this week may offer a rare moment of calm to do so.
The Fed is divided enough ahead of its Sept. 20-21 rate meeting that a nudge from its most influential policymaker could make the difference, and even some investors have begun to argue it is time for the central bank to stop worrying so much about what markets expect.
"Let's get on with it already," said Michael Arone, chief investment strategist at State Street Global Advisors.
"It will cause some challenges to the market but I think that is healthy in context of a normal business cycle," Arone said. "It will increase the cost of capital, and flush out some riskier assets in the short term. But that is probably the right thing to do."
A Reuters poll last week suggested it is a very long shot.
The poll showed the median probability of a rate rise provided by economists was about one-in-four and only 6 percent of those surveyed expected the Fed to act, with the majority expecting the Fed to wait until December.
Citi: Central Bank Meetings Could Make This Week One of 'Global Repricing'
"It is going to be a crucial week for global macro risk, as the BOJ and the Fed convene to decide on interest rates," write analysts at Citigroup Inc., led by David Lubin on Monday. "We believe the post-BOJ/Fed price action may end up being more nervous than many investors originally thought ... It could be a week of global repricing."
Amid dovish speeches from a slew of Fed governors, a clutch of U.S. economic data that hasn't come in strong enough to convince market participants, and a rise in market volatility, odds of a September Fed rate hike have fallen from 34 percent at the beginning of the month to 20 percent today.
"A risk-on start to the week but it's how the Fed positions the market for a December hike, and whether the BOJ tries to get the curve steeper and yen down, which matters," writes Kit Juckes, global strategist at Societe Generale SA, in a research note on Monday.
Barclays Plc expects the Fed to go against market expectations. "We retain our outlook for a rate hike in September," the team, led by Michael Gapen, said in a note published Monday, citing diminishing external risks to the U.S. economy. Nevertheless, the analysts say the September rate call is a close one, and Federal officials could instead send a hawkish signal about the prospect of a December rate hike.
Other analysts, such as those at Goldman Sachs Group Inc, have pushed back their Fed-hike calls to December this year from September.
Chetan Ahya, economist at Morgan Stanley, suggests central bankers this week will signal that the global economy will continue to muddle through deflationary pressures for the rest of the year, with the BOJ expanding its stimulus policies. But he adds: "Rather than watching for the next central bank move, we think that the next important development to monitor on the policy front is the rhetoric or action around fiscal policy."
Oil prices fell on Tuesday
Oil prices fell on Tuesday after Venezuela said that global supplies needed to fall by 10 percent in order to bring production down to consumption levels, and technical indicators also pointed to cheaper crude futures.
International benchmark Brent crude oil futures LCOc1 were trading at $45.82 per barrel at 0649 GMT, down 13 cents from their last close.
U.S. West Texas Intermediate (WTI) crude futures CLc1 were down 19 cents at $43.11 a barrel.
Reference: Reuters,Bloomberg
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