Economies today face a litany of challenges they have not faced in the last decade: Putin's war in Ukraine, record-breaking inflationary pressures, looming global recession and the struggle to stay ahead of the ongoing climate crisis. The banks are doing what they can to slow down inflation, but not the Bank of Japan. His decision may remain unchanged. Meanwhile, geopolitical uncertainty, the threat of further disruption to the global supply chain and higher interest rates remain key risks to Canada's economic growth.
Bank of Japan
Japan's benchmark interest rates have been among the lowest in the world for decades.
Part of the yen's recent strength stems in part from talk that the BoJ may change its yield-curve control policy now that consumer price inflation has surged to 3.7% - an eight-year high. However, such a move seems unlikely. Japan's central bank has pledged to pursue an "over-inflation" policy and appears to have no intention of curbing its extremely loose monetary policy.
Inflation in Japan is low compared to rates in other developed economies, which allows the country's central bank to keep interest rates very low. Although the Bank of Japan has raised its inflation forecast for 2022 to 2.9%, down from its previous forecast of 2.3%, it is expected to keep its key short-term interest rate at -0.1% and maintain the 0% cap for its 10-year bond yield at this month's meeting.
During his decade in office, Kuroda, seeking to push inflation to 2%, introduced massive asset purchase and YCC, an elaborate program that combined a negative short-term target rate and a 0% cap on 10-year bond yields.
In addition to the global supply pressure caused by the war in Ukraine and the pandemic, the collapse of the yen triggered a sharp increase in the cost of imported raw materials and ultimately household goods, making Kuroda and its currency-deprecating low interest rates the target of public outcry
As Japan's massive pile of debt makes an abrupt interest rate hike too costly, the BoJ will tread carefully and explain the shift as a gradual move towards normalizing emergency stimulus - rather than full monetary tightening, they said.
But policymakers also know they are running out of time to deal with the huge costs of the Bank of Japan's relentless defense of its 0% yield cap, such as declining bond market liquidity, crushed bank margins and a devastating yen sell-off.
BOJ officials are now preparing the theoretical basis for future policy change, releasing research into whether firms and households will finally shake off their deep-seated reluctance to raise prices.
Any apparent shift in BoJ thinking, even if it does not lead to an immediate change in monetary policy, could trigger a massive sell-off in Japanese bonds, with significant implications for global markets.
Canada GDP
The Canadian economy is moving closer to a recession in 2023. Early signs of easing inflationary pressures raise the odds that the slowdown will be "mild" by historical standards. Unemployment fell to a record low in the summer (at least since 1976) and only slightly increased since then.
The US economy is also expected to plunge into recession in 2023, which will take a toll on Canadian exports.
Price growth is still well above the central bank's targets, but increases have been smaller and less widespread in recent months. The crisis in the global supply chain, which largely contributed to the initial rise in inflation, is weakening. Commodity prices remain high but have fallen after a sharp rise earlier this year when Russia invaded Ukraine.
Withholding interest rate hikes will not prevent a recession in Canada in the coming year. A mild deterioration of the economic situation is probably already certain in the light of the current restrictive level of interest rates.
GDP is expected to stay at 0.1%, but neither rising nor falling suggests stagnation, which could lead to a mild recession.
Source: investing.com
