The Bank of Japan (BOJ) is in a tricky spot. They have trimmed their bond purchases from around 6 trillion yen to 4 trillion yen. But many expect them to hike rates soon. Inflation has been looking better, which is a good sign. Yet, the dollar remains strong compared to the yen. This means the BOJ has some catching up to do.
Even if they don't hike rates now, markets expect action soon. It is about getting back to normal for the BOJ. Wage talks are on track, giving them more confidence for future policy changes. The BOJ needs to act to match the US.
The current slow steps by the BOJ have disappointed markets. The dollar's strength and possible Fed moves are also in play here. The Fed might hint at a rate cut soon. Markets believe a September cut is likely. But the Fed won't commit to a set path yet. They will watch inflation numbers closely to decide their next steps.
Japanese assets and the yen are also in focus. There is still a lot of short betting in the market. The ten-year Japanese Government Bond (JGB) is expected to stay around the 1.15 to 1.25 level. The BOJ is not expected to make aggressive moves. Their bond purchases are still significant, but small compared to the total balance sheet.
Looking at the US, the labor market is a key factor. Many have been waiting for a Fed rate cut for months. Even if a cut happens in September, what happens next is crucial. The US elections are coming up, and political factors could impact the Fed's decisions. Trump has opposed rate cuts, which he thinks might favor Kamala Harris.
Campaign promises by Trump might also affect inflation. Actions like tax cuts or immigration controls could pose challenges for the Fed's plans. There is uncertainty about rate cuts beyond this year.
The US Treasury yield curve is another point of interest. Analysts are keeping an eye on how it might change by the end of the year. The curve reflects the difference between two-year and ten-year yields. Changes in the curve can signal shifts in economic expectations.
Both the BOJ and the Fed have tough decisions ahead. They need to balance market expectations, political pressures, and economic data. The coming months will reveal how they navigate these challenges.