BOJ Keeps Policy On Hold, Brightens View Of Economy

The Bank of Japan kept monetary policy steady and took a more upbeat view of the economy on Tuesday, reinforcing market expectations that its future policy direction could be an increase – not a cut – in interest rates.

Reflecting a pick-up in emerging Asian demand and factory output, the central bank upgraded its language to signal its confidence that the economy is headed for a steady recovery.

“Japan’s economy continues to recover moderately as a trend,” the BOJ said in a statement announcing the policy decision. It also offered a brighter view on exports and output to say they were picking up.

But the central bank warned the impact of U.S. monetary policy on global markets was among risks to the outlook, suggesting that the Federal Reserve’s interest rate hike cycle could disrupt emerging market capital flows.

As widely expected, the BOJ kept unchanged its pledge to guide short-term rates at minus 0.1 percent and the 10-year government bond yield around zero percent.

“The global economy recovered earlier than expected and the yen is weakening. Tailwinds are blowing, and the BOJ can stand pat for a while,” said Hiroshi Shiraishi, an economist at BNP Paribas.

Underscoring its optimism on the outlook, the central bank even revised up its view on private consumption – considered a soft spot for the Japanese economy, the world’s third largest.

“Consumption is moving on a firm note,” it said, a brighter view than last month when it said there were some weak signs.

At the previous meeting on Nov. 1, the BOJ said the economic trend was for moderate recovery, but slowing emerging market demand was weighing on exports and output.

FOCUS ON KURODA

Financial markets are focusing on what BOJ Governor Haruhiko Kuroda will say at his post-meeting news conference about the recent rise in yields.

Japanese long-term interest rates have risen in tandem with global bond yields on expectations of steady U.S. interest rate hikes and the perceived inflation-stoking policies of incoming U.S. President Donald Trump.

This has tested the BOJ’s resolve to cap the 10-year Japanese government bond (JGB) yield around its zero percent target.

That in turn has led to some market expectations the BOJ may raise its target for the 10-year JGB yield, which briefly hit 0.1 percent last week, as early as next year.

Markets Flat in October as Banks Rise

Equity markets were stable over the month of October in euro terms as investors awaited the election of a new government and higher interest rates in the US. The STOXX® Global 1800 Index rose 0.6% for the month, while it posted a loss in dollar terms.

Speculation that US interest rates will rise in December and better-than-expected earnings releases in the industry helped banking shares rebound, according to strategists. At the other end, investors sold healthcare stocks on concern that a Democratic Party victory in the US elections would stymie earnings growth.

The STOXX® Europe 600 Index fell 1% in October, while the STOXX® USA 900 Index dropped 2%.

Banks, Greece on Top

The STOXX® Global 1800 Banks Index rose 6.7% in the month to lead gains among 19 sectors.

Investors have reassessed the outlook for global inflation and interest rates, with the futures market now all but predicting a 25-basis point hike in the Fed funds rate at the Federal Reserve’s meeting in December. Minutes from the September meeting of the Federal Open Market Committee, released Oct. 12, indicated that rates could rise “relatively soon.”

Most large US banks – from J.P. Morgan to Goldman Sachs – and European peers including Deutsche Bank reported earnings in October that beat analysts’ forecasts on higher trading revenue.

Gains in October were not strong enough to erase the sector’s losses in 2016. Investors have sold banking shares this year as they said that record-low interest rates will reduce profits and on concern about the levels of lenders’ capital and non-performing loans.

The STOXX® Global 1800 Automobiles & Parts Index came in second in October with a 3.6% increase, as figures showed an increase in European car sales. The STOXX® Global 1800 Basic Resources Index was the third-best performing industry with a 3.1% advance, as industrial metals continued to climb.

There was also a rebound in the battered-down markets of southern Europe, which helped pare some of their year-to-date declines. The STOXX® Greece Total Market Index led gains among 65 STOXX country indices, adding 5.6%. The STOXX® Spain Total Market Index and the STOXX® Italy Total Market Index followed with advances of more than 4.4% in the month.

In Spain, Prime Minister Mariano Rajoy managed to break a ten-month parliamentary deadlock to start his second term. Greece continues to negotiate new terms on its debt with international agencies. Investors are meanwhile waiting for the Dec. 4 referendum on Italy’s constitutional reform that is likely to decide the continuation of Prime Minister Matteo Renzi’s government.

Healthcare weak on US elections campaign

Sector performance during October was driven by expectations about the US Presidential elections result. The STOXX® Global 1800 Healthcare Index led losses with a 4.5% retreat as investors sold drug-makers’ shares citing concern that a victory for Democrat candidate Hillary Clinton would lead to caps on drugs prices and encourage competition from generic pharmaceutical companies.

The STOXX® Global 1800 Real Estate Index finished second from bottom in October with a 2.6% retreat. The STOXX® Global 1800 Telecommunications Index was the third-worst performing sector after losing 2%.

The STOXX® Belgium Total Market Index was the worst-performing country benchmark last month, dropping 5%. The STOXX® Israel Total Market Index and the STOXX® Finland Total Market Index followed, with losses of 4.5% and 3.9% respectively.