Japanese Yen Forecast: BOJ “Green Lights” Resumption of Carry Trade but Questions Remain

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Governing Council members began their deliberations by discussing the prospects for global growth. Overall, their forecast had not materially changed since the April Monetary Policy Report. The global economy was expected to continue growing at around 3%, while inflation in major economies was forecast to continue easing gradually toward central bank targets. Members exchanged views on the outlook for US economic growth and inflation. Recent data had indicated that the US economy had begun to slow in the first half of the year, largely due to the long-anticipated moderation in US consumer spending. A cooling labour market could further dampen consumption. At the same time, members discussed the risk that US consumption could rebound, given the persistence of earlier strength and retail trade data for June that had been stronger than expected. Inflation in the United States looked to have resumed its downward track, although there was still some stickiness in the growth of services prices. In Europe, growth had come in a bit stronger following a weak 2023. Tourism was providing a boost to activity. Labour costs remained high and may have been contributing to services price inflation in the euro area. The extent to which these costs are passed through to prices or absorbed through tighter margins was uncertain. China’s domestic economy remained weak even as exports were strong. However, prospects for continued strong export growth were clouded by trade restrictions and tariffs. Members discussed how financial conditions had eased since the April Report. Yields for short-term bonds had declined by around 50 basis points as markets increasingly anticipated that monetary policy would start easing in the United States. Corporate credit spreads remained narrow and corporate debt issuance was robust. Equity markets in the United States and Canada were resilient. The large gains in the US were mainly attributed to technology companies and the boom in artificial intelligence, but strength had recently spread to other sectors. post: BOC MINUTES: MEMBERS AGREED TO CLEARLY COMMUNICATE THAT THEY WOULD BE WEIGHING THE FORCES THAT COULD PULL INFLATION BELOW THE TARGET AGAINST THOSE THAT COULD HOLD IT ABOVE THE TARGET post: GOVERNING COUNCIL SAW LESS CHANCE THAT PENT-UP DEMAND WOULD LEAD TO A SUDDEN RISE IN HOUSE PRICES AS RATES WERE CUT: MINUTES post: BOC MINUTES: AHEAD OF BANK OF CANADA'S JULY 24TH RATE ANNOUNCEMENT, THE GOVERNING COUNCIL SAW RISK THAT CONSUMER SPENDING COULD BE SIGNIFICANTLY WEAKER THAN EXPECTED IN 2025 AND 2026.