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- Asian shares struggled on Tuesday as caution reigned ahead of this week’s U.S. Federal Reserve decision on interest rates, while the yen edged higher after the Bank of Japan refrained from any new policy steps. The Bank of Japan kept its monetary base target in place at its latest review on Tuesday while repeating that core CPI views remain flat. The BoJ asset program focused on government bonds is now ¥80 trillion annually.
- The Bank of Japan is expected to warn of heightening global risks at its monetary meeting on Tuesday, but will hold off on expanding stimulus to preserve its limited policy options in case a looming U.S. rate hike decision sparks a fresh wave of market volatility. A run of poor data, including weak exports, feeble wage growth and soft household spending, has ramped up pressure on the BOJ to deploy additional monetary steps to reflate the economy out of a second-quarter contraction. A shift in the board’s composition means if BOJ Governor Haruhiko Kuroda were to pull the trigger, he could count on more votes than last October when his proposal to expand stimulus won by a razor-thin margin. But many BOJ policymakers are wary of acting now, concerned about the diminishing returns and rising costs of the bank’s huge asset buying that is already drying up bond market liquidity.
- The U.S. Federal Reserve, facing this week its biggest policy decision yet under Chair Janet Yellen, puts its credibility on the line regardless of whether it waits or raises interest rates for the first time in nearly a decade. In a way it is a “damned if you do, damned if you don’t” situation for the Fed despite months of fine-tuning its message, dissecting economic data, and carefully building a consensus around the idea of a cautious and gradual “lift-off” from near zero rates towards levels it considers normal. A chorus of prominent detractors, including former U.S. Treasury Secretary Lawrence Summers, argues raising rates now would be wrong given market turmoil caused by worries about China’s economic health and global growth, and the absence of inflation risks at home. Others say the central bank’s credibility will suffer if it delays the long-telegraphed move and prolongs investors’ guessing game about the timing of the lift-off. The central bank, for its part, has left the door open to a modest rate rise on Thursday, following a two-day meeting. Recent comments by Fed officials suggest it will try to comfort investors with pledges that whatever it decides it will keep nurturing the economic recovery.
- Crude oil gained in early Asia on Tuesday with investors focused on U.S. stockpile estimates from the American Petroleum Institute later in the day. On Friday, the IEA, a Paris-based agency, downgraded its forecast for U.S. production next year, citing the wide-ranging impact of Saudi Arabia’s strategic policy aimed at undercutting shale driller in the U.S. In 2016, the IEA predicts that U.S. shale production will fall by 400,000 barrels per day, significantly below OPEC estimates of a 50,000 bpd increase. The IEA is regarded by many experts in the industry as one of the world’s foremost providers of statistics and analysis on global energy. Crude futures are down by nearly 60% since peaking above $100 a barrel in the summer of 2014. Last November, OPEC roiled global energy markets with its decision to keep its production ceiling above 30 million barrels per day in an effort to defend its market share. In addition, the IEA forecasts that global crude output will decline by a half million barrels per day next year, four-fifths of which will be concentrated among U.S. shale producers.