Despite the weaker growth forecasts, investor bets on a July Bank of Japan rate hike linger. Economic indicators on Wednesday and Friday could dictate the BoJ’s policy maneuvers on July 31.
Japan’s Services PMI
On Wednesday, July 24, economists expect the Jibun Bank Services PMI to increase from 49.4 in June to 49.9 in July.
A higher-than-expected PMI could raise investor bets on a July BoJ rate hike. The BoJ needs the services sector to fuel demand-driven inflation. A sector returning to expansion could justify a rate hike to bolster the Japanese Yen.
However, investors should consider the sub-components, including prices. Higher wages would support a pickup in private consumption if a stronger Yen eases import price pressures.
Tokyo Inflation in Focus
On Friday, economists forecast Tokyo’s core inflation rate to rise from 2.1% in June to 2.2% in July.
A higher-than-expected core inflation rate could cement bets on a July BoJ rate hike.
Upward consumer price trends in Tokyo would align with national inflation trends. Japan’s inflation rate accelerated for the second month in June, supporting expectations of a July BoJ rate hike.
Bank of Japan Plans to Cut Japanese Government Bond Purchases
Beyond the possibility of an interest rate hike, the BoJ announced it would disclose its plans to reduce Japanese Government Bond (JGB) purchases in July.
A marked reduction in JGB purchases would likely narrow interest rate differentials between the US dollar and the Yen more significantly than rate hikes.
With US interest rates at 5.5%, a 0.1 to 0.5% increase by the BoJ would leave interest rate differentials firmly tilted toward the US dollar.
A BoJ rate hike and a convincing cut to JGB purchases could support a USD/JPY drop below 150.
What the Experts Say
Economists hold mixed views about the July BoJ monetary policy decision.
Unlimited Chief Investment Officer Bob Elliot commented on the national inflation numbers for June, stating,
“Japan continues to experience weak inflation, wage growth, demand, and GDP in contrast to much of the DW, with little urgency to tighten. While there are plenty of headlines trying to make a case for tightening, a more careful look at the data suggests little urgency.”
Bob Elliot attributed higher inflation to the roll-off of energy and travel subsidies. He also said there are expectations that the government will reintroduce subsidies in the summer, a downward drag on inflation.
Considering the likely effects of rate cuts and reductions in JGB purchases, the BoJ could cut JGB purchases more aggressively.
Nataxis Asia Pacific Chief Economist Alicia Garcia Herrero recently commented on JGB purchases, stating,
“Bank of Japan to start quantitative tightening, which could support the Yen more than intervention.”
US Economic Indicators
On Wednesday, the US housing sector will be in focus.
Economists predict existing home sales will increase by 3% in June after falling by 0.7% in May. Better-than-expected numbers could boost US dollar demand.
High demand for existing homes could tighten housing inventories and raise house prices. Higher house prices and tighter inventories may also push rental prices up. Higher rents can fuel housing services and headline inflation, which may reduce expectations of multiple 2024 Fed rate cuts.
However, investors should consider trends, as tight inventories can create volatile monthly existing home sales.
