October Update: BOJ & BSP Monetary Policy, The Stock Market

Authored by: Trisha Chen, Paulo Mercado, Kendrick Ong, Xian Tumang

Edited by: Jared Go, Ethan So, Elijah Soriano

Latest Economic Data and Events

• Philippine Economic Data

  • BSP cuts RRP by 25 bps, from previous 6.25% to 6.00%

  • YoY Q3 GDP growth at 5.2%

  • YoY CPI Inflation at 2.3%

  • Unemployment rate decreases to 3.7%

• Japan Economic Data

  • BOJ keeps its policy rate at 0.25%

  • YoY CPI Inflation decelerated to 2.5% in September

• US Economic Data

  • Federal Reserve cuts the target Federal Funds Rate by 25 bps to 4.50% to 4.75% 

  • YoY PCE Inflation drops to 2.1% in September

  • Unemployment rate remains unchanged at 4.1% in October

Introduction

Throughout the month of October, both global and local financial markets remained steady as indicated in figure 1. While the month came with no major surprises, there were some relevant events that occurred involving monetary policy decisions. As the employment rate and other key indicators of the US economy stabilize in the eyes of the Bank of Japan (BOJ), Ueda’s recent press conference suggests that the bank's next interest rate hike may be coming soon. In contrast, yet in line with trends of other central banks around the world, the BSP cut the RRP by 25 basis points (bps).

Figure 1. PSEi, TOPIX, and S&P500.

Source: TradingView

BOJ Monetary Policy Decision

During the Monetary Policy Meeting held October 30, 2024, the BOJ decided to keep the uncollateralized overnight call rate unchanged at approximately 0.25% which was in line with economists’ expectations (Fujioka & Ito, 2024).

While this decision was expected, Governor Ueda’s remarks at the press conference marked a shift in tone. In previous press conferences following the aftermath of the yen carry trade unwinding, Ueda often emphasized that the BOJ would need "ample time" to monitor economic risks before making any policy changes, underscoring a cautious approach. However, he avoided that phrase during the recent press conference, suggesting a subtle adjustment in the BOJ’s outlook. When asked about the removal of this statement, he said it was no longer needed on the back of what the BOJ views as improvements in US economic data. This sudden shift in language may be implying that an interest rate hike is coming soon, with current consensus pointing toward a potential increase as early as December or January (Fujioka & Ito, 2024).

However, recent U.S. economic data has shown gradual improvement, and market stability is returning. Specifically, the unemployment rate has declined from 4.3% to 4.1% and remains stable (U.S. Bureau of Labor Statistics, 2024). Also, the flash U.S. composite PMI came out at 54.3 indicating that business activity grew in October due to strong demand (Reuters, 2024). Furthermore, from the BOJ’s outlook report, the decline in U.S. inflation rates, alongside Federal Reserve rate cuts suggests that the U.S. economy is less likely to experience a major slowdown. As a result, Ueda noted that the reduced uncertainty surrounding the U.S. economy has helped improve the outlook, making it easier to assess future risks and adjust policies accordingly.

Japan Inflation and Inflation Expectations

Figure 2. Japan Headline, Core, and Core Core CPI Inflation.

Source: Statistics Bureau of Japan

The present state of the Japanese economy is different from what it was in the past few decades. As mentioned in the August Update, the Japanese government ended its negative interest rate policy (NIRP), yield curve control (YCC), and qualitative and quantitative easing (QQE).

In the recent inflation data released last October 18, decreases in electricity and gas prices and the resumption of government subsidies for utility bills led to a 0.5 percentage point drop in the headline consumer price index (CPI) (Reuters, 2024). Core CPI inflation decelerated for the first time in five months because of the aforementioned resumption of subsidies from August to October as announced by Ex Prime Minister Fumio Kishida earlier in the year. 

Due to the global inflationary crisis from 2022 to 2023, Japan’s headline CPI inflation increased to a peak of 4.3%. Alongside this, core and core-core CPI inflation increased as well, which indicates that inflation was not limited solely to volatile food and energy prices, but on the broader level as well. While inflation in the country has generally been on a downward trend since it peaked in 2022, all three aforementioned metrics currently hover above the BOJ’s 2% goal. This event gave Japan a chance to re-anchor inflation expectations back to the 2% goal, something that has not been seen over the past three decades. To re-anchor inflation expectations, the BOJ kept its expansionary monetary policy setting throughout this timeframe instead of raising interest rates like what other central banks did.

Figure 3. Firms’ Inflation Outlook for their own Products/Services

Source: BOJ

In the latest TANKAN survey from the BOJ, Japanese firms’ inflation expectations for their goods/services held steady compared to the second quarter survey, with only a slight 0.1% increase in the 5-year outlook. Following the surge in inflation expectations during the global inflationary crisis of the pandemic, Japanese firms continue to project inflation above the BOJ’s 2% target. Fluctuations in the actual inflation can significantly influence inflation expectations and vice versa. Inflation outlooks help firms in setting prices, as well as influencing the consumption and saving decisions of households (Arcin & Castañares, 2022). Therefore, having well-anchored inflation expectations can contribute to economic stability (BOJ, 2024). As of January 2024, the BOJ’s 10-year ahead composite indicator of long-run inflation expectations was at 1.5%, implying that there’s still room for growth before inflation expectations get well-anchored.

BOJ Outlook Report

Table 1. Comparison of July and October Projections.

Source: BOJ

In the October Outlook Report, the BOJ’s forecasts remained generally consistent with their previous projections, with inflation fluctuating near its 2% target in the next few years. The report notes a slight decrease of 0.1% in both core-core CPI for FY24 and GDP growth for FY25, along with a 0.2% increase in the core CPI expectation for FY25. “Our basic stance regarding monetary policy is that if the economic and price outlook is realized, then we will raise the policy interest rate accordingly and adjust the level of monetary easing”, Ueda stated. While the stance on monetary policy remained the same, Ueda made it clear that basic decisions would be made based on the data and other information collected up to that point in each decision. The minor changes to the projections in this outlook report imply that the BOJ will continue with its path of policy normalization.

Risks to BOJ Monetary Policy

Analysts believe that the value of the Yen will be a key signifier of the BOJ's implementation of monetary policy. Should the Japanese Yen depreciate to 155 against the dollar, import costs would likely rise, theoretically pushing the BOJ to hike rates in an attempt to regulate this increase in inflation. Economists surveyed by Bloomberg also indicate that although there is a collective consensus on this approaching rate hike, the exact timing still remains uncertain with results showing expected occurrence in either December or January (Bloomberg, 2024).

Figure 4. Japanese Yen per US Dollar Exchange Rate.

Source: TradingView

In light of the recent Japan elections, the LDP, along with newly elected Prime Minister Shigeru Ishiba and his administration, may face challenges that significantly affect the BOJ and its monetary policies moving forward (Hughes, 2024). Prime Minister Shigeru Ishiba pledged to push for a more conservative approach to government stimulus measures and fiscal spending contrary to Abenomics- one used throughout past administrations. This includes the LDP’s call for a change in the BOJ’s target inflation rate, reducing it to one exceeding 0% rather than the initial 2% (Reuters, 2024). This raised concerns as the need for his administration to form alliances with other political parties, particularly the opposition, sets conflict regarding the implementation of fiscal policy as the Constitutional Democratic Party of Japan (CDPJ) urges for greater government spending instead. Analysts suggest that this may put the BOJ in a state of uncertainty, causing a delay in their plan for a rate hike due to the adoption of these aggressive fiscal policies and what they may trigger. Especially if the effects of expanding fiscal policy prove to only be short-term, implementing immediate rate hikes can make it harder to maintain steady progress toward their inflation targets.Overall, the interplay between political uncertainty and BOJ’s rate hikes may result in market volatility in Japan, experts suggest (Reuters, 2024).

BSP Monetary Policy Decision and Outlook

On October 17, 2024, the Bangko Sentral ng Pilipinas announced a 25 basis point (bps) rate cut to the Target Reverse Repurchase (RRP) rate from 6.25% to 6.00%. This marks the second rate cut the BSP has implemented in 2024 after the Monetary Board’s first announcement of a 25 bps cut to the RRP rate in August. According to Governor Remolona in his statement during the Media Briefing on the Monetary Policy Stance, the BSP’s decision was primarily anchored in the expectation that price pressures would remain manageable. This in turn was supported by an easing inflation forecast for the rest of 2024, shifting downwards from 3.3% to 3.1%, reflecting inflation rate slowdowns in some food commodities, and the effects of lower import tariffs on rice.

However, on the other hand, the BSP’s inflation forecasts for 2025 and 2026 had also increased from the previous forecasts of 2.9% for 2025 and 3.3% for 2026 to 3.3% and 3.7%, respectively. Though the Board affirmed that these figures still fall within the target range, the increase reflects the BSP’s expectations of rising inflation risks: domestically in the form of potential changes in electricity rates and a higher minimum wage outside Metro Manila, and internationally in the form of higher global oil prices. It has to be noted, however, that though the Monetary Board foresees an upside shift in inflation risks, they also mention that these could be tempered by the aforementioned lower import tariff fees on rice.

Overall, the BSP continues to expect strong domestic economic growth throughout the remainder of 2024 until the end of 2026, which reflects foreseen improvements in household income and consumption, as well as government spending. Though Assistant Governor Abenoja stated that the full economic impacts of monetary policy decisions are not expected to occur until 12 to 18 months after announcement, the BSP affirms their August and October rate cut decisions to be in line with their overall monetary easing cycle and goal of less restrictive monetary policy.

When it came to future prospects and policy going into 2025 and 2026, Governor Remolona eyed measured, but aggressive potentialities in the BSP’s direction. A final 25 basis point cut in December to close out 2024 is still within the realm of possibility, and would mark the first time since February 15, 2023 that the key interest rate has fallen below 6%.

Figure 5. BSP Reverse Repurchase Rate.

Source: BSP

In addition to this, the Governor explained that a 50 bps rate cut in December would be too aggressive, even though it was not completely off the table if they foresee the possibility of a hard landing. The Board reiterated that the BSP takes measured steps in monetary policy, and a rate cut as large as 100 bps would most likely be spread out as four 25 bps cuts over 2025. This is in line with the Monetary Board’s laid out target for the nominal neutral rate of 5%, the neutral rate being the ideal level of interest to drive consistent economic growth whilst keeping inflation within target ranges.

Conclusion

Due to the level of impact that central banks have on both the economy and the financial markets, it is essential for investors to monitor them. This is especially applicable during times when central banks enter either rate hike or rate cutting cycles as they may make decisions that have a significant impact on the markets. The monetary policy decisions of central banks will be heavily dependent on their outlook, and the potential risks that could deviate the economy away from their forecasts.

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References

Arcin, A & Castanares, L. (2022, October). Inflation Expectations: Some observations from BSP’s surveys. Bangko Sentral ng Pilipinas. https://www.bsp.gov.ph/Media_And_Research/Publications/EN22-04.pdf

Bangko Sentral ng Pilipinas. (2024). Media briefing on the Monetary Policy Stance | Monetary Policy Stance Media Briefing 16 October 2024 | By Bangko Sentral ng Pilipinas | Facebook. https://www.facebook.com/BangkoSentralngPilipinas/videos/1672290086674553/?rdid=Df5KUGY2RJK5vc38

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Consumer Price Index. (2024, October). Statistics Bureau of Japan. https://www.e-stat.go.jp/en/stat-search/files?page=1&layout=datalist&toukei=00200573&tstat=000001150147&cycle=1&year=20240&month=23070909&tclass1=000001150149&result_back=1&tclass2val=0

Financial System Accounts. (n.d.). Bangko Sentral ng Pilipinas. https://www.bsp.gov.ph/SitePages/Statistics/Financial%20System%20Accounts.aspx?TabId=14

Fujioka, T & Ito, S. (2024, October 31). Ueda Indicates BOJ Still on Track for More Rate Hikes After Hold. Bloomberg. https://www.bloomberg.com/news/articles/2024-10-31/boj-holds-rates-as-japan-s-unstable-politics-raises-uncertainty

Kihara, L. (2024, October 16). Japan premier Ishiba vows big spending, drifts away from fiscal restraint. Reuters. https://www.reuters.com/world/japan/japan-premier-ishiba-vows-big-spending-drifts-away-fiscal-restraint-2024-10-16/

Kihara, L. (2024, October 18). Japan’s core inflation slows on fuel subsidies, demand-driven pressure intact. Reuters. https://www.reuters.com/markets/asia/japans-core-inflation-slows-september-fuel-subsidies-2024-10-17/

Kihara, L. (2024, October 22). Japan’s general election outcome could muddle the BOJ’s plans. Reuters. https://www.reuters.com/world/japan/japans-general-election-outcome-could-muddle-boj-plans-2024-10-22/

Nakazawa, T. (2024, May). Assessing Measures of Inflation Expectations: A Term Structure and Forecasting Power Perspective. Bank of Japan. https://www.boj.or.jp/en/research/wps_rev/rev_2024/data/rev24e04.pdf

Outlook for Economic Activity and Prices. (2024, November 1). Bank of Japan. https://www.boj.or.jp/en/mopo/outlook/gor2410b.pdf

Reuters. (2024, October 24). US business activity rises in October; price pressures easing. Reuters. https://www.reuters.com/markets/us/us-business-activity-rises-october-price-pressures-easing-2024-10-24/

Statement on Monetary Policy. (2024, October 31). Bank of Japan. https://www.boj.or.jp/en/mopo/mpmdeci/mpr_2024/k241031a.pdf

TradingView. (n.d.). https://www.tradingview.com/

The Associated Press. (2024, October 2). Japan’s parliament elects Shigeru Ishiba as prime minister. OPB. https://www.opb.org/article/2024/10/01/new-ldp-party-leader-shigeru-ishiba-becomes-japan-s-prime-minister/