Asia-Pacific Markets Downturn as Bank of Japan (BOJ) Begins Policy Meeting

Tuesday July 30th, 2024

Asia-Pacific markets are experiencing a downturn as the Bank of Japan (BOJ) begins its two-day monetary policy meeting. This meeting is drawing significant attention from investors and economists alike, as it could potentially mark a shift in Japan's monetary policy.

The BOJ is expected to raise its benchmark interest rate to 0.1%, up from the current range of 0% to 0.1%, according to a Reuters poll of economists. This potential rate hike, along with an anticipated reduction in Japanese government bond purchases, signals a possible move away from the ultra-loose monetary policy that has been in place for years.

Across the region, stock markets are showing signs of decline:

- Japan's Nikkei 225 futures indicate a lower opening, despite a 2% gain on Monday.
- Australia's S&P/ASX 200 futures are trading slightly below their previous close.
- Hong Kong's Hang Seng index futures are also down.

The market reaction appears to be driven by caution ahead of several central bank meetings this week, including the U.S. Federal Reserve and the Bank of England, in addition to the BOJ.

In Japan, recent economic data has been mixed. The unemployment rate for June unexpectedly fell to 2.5%, down from 2.6% in the previous month, indicating a tightening labor market. This data, along with other indicators, suggests that the Japanese economy may be on a recovery track, potentially supporting the case for monetary policy normalisation.

However, the decision to raise rates is not a foregone conclusion. While the market is currently pricing in a 60% chance of a rate hike, some analysts point out that real wage growth in Japan remains negative, which could give the BOJ pause.

In the broader Asian context, this week will see the release of several important economic indicators:

- China's July Manufacturing and Non-manufacturing PMIs
- Australia's June retail sales and CPI data
- South Korea's industrial production figures

These data points, along with the central bank decisions, are likely to influence market sentiment and movements in the coming days.

In the United States, Wall Street showed mixed results overnight, with the S&P 500 and Nasdaq posting slight gains while the Dow Jones Industrial Average experienced a minor decline. Investors in the U.S. are focusing on corporate earnings reports and awaiting the Federal Reserve's policy update, although no change in interest rates is expected at this meeting.

As markets navigate these various factors, the BOJ's decision on Wednesday will be crucial in determining the near-term direction for Asian markets, particularly in Japan. A rate hike could potentially strengthen the yen and impact export-oriented companies, while also signaling confidence in Japan's economic recovery.

Jake Robson, Editor