Weak Consumer Spending Complicates BOJ's Rate Decision
Insiders have revealed that Bank of Japan officials now believe that the decision on whether to raise interest rates at next week's policy meeting has become complicated due to weak consumer spending.
The insiders said that some officials believe that if they choose not to raise interest rates in July, it would give them more time to study the upcoming data to confirm whether consumer spending will rebound as expected. Some of them believe that the Bank of Japan should avoid giving the impression of being too hawkish.
At the same time, given that the inflation rate is basically in line with expectations, other officials are more willing to raise interest rates at the July meeting. They believe that the policy interest rate range of 0% to 0.1% is very low, and given the high uncertainty in the future, they might miss this opportunity to raise rates.
The insiders added that at the meeting ending on July 31, Bank of Japan officials may wait until the last moment to make a final decision after reviewing the latest market and economic condition data. Affected by this news, the yen gave up nearly half of its intraday gains.
In addition, the Bank of Japan will also announce its plan to reduce bond purchases in the decision. Insiders said that market participants have a better understanding of the Bank of Japan's position on reducing bond purchases, which is gratifying to some officials.
Insiders revealed that central bank officials are aware that many market participants now expect the monthly purchase scale to be reduced to 3 trillion yen within two years. Officials also expect that if bond yields rise sharply, the central bank will intervene, regardless of whether this commitment is written in the statement.
Currently, most observers expect that the Bank of Japan will maintain interest rates at this meeting, as raising borrowing costs while reducing bond purchases would be considered too aggressive a move. One-third of analysts expect an interest rate hike, basing their prediction on the continued weakness of the yen.
A survey last month showed that economists generally believe that if the central bank continues to do nothing on interest rates, it will lead to a devaluation of the currency again. So far this year, the US dollar has risen more than 11% against the yen, which is equivalent to a depreciation of the yen by more than 10% against the US dollar.
According to the latest data from the U.S. Commodity Futures Trading Commission (CFTC), leveraged funds reduced their net short yen positions by 38,025 contracts in the week ending July 16, the most since March 2011. However, after the reduction, there are still 76,588 short contracts.