5thMarch 2024
Tuesday
Tuesday ispoised to be a significant day for economic news, with two key events on theagenda. Firstly, the Governor of the Bank of Japan, Ueda, is scheduled todeliver a speech. In conjunction, the United States is set to release its ISMServices PMI data, providing insights into the service sector's performance.
JPY - BOJ Gov Ueda Speaks
Scheduled todeliver a keynote address at FIN/SUM 2024 in Tokyo, the current Governor of theBank of Japan, serving from April 2023 to March 2028, holds a pivotal role inshaping market sentiments. His speeches are keenly observed for their potentialimpact on currency valuation, as a more hawkish stance than anticipatedtypically bolsters the currency's strength. Given his significant influence overshort-term interest rates as the head of the central bank, traders meticulouslyanalyze his remarks for hints of forthcoming changes in monetary policy andinterest rate adjustments, often leading to heightened market volatility duringhis addresses.
During adiscussion with the Keidanren in Tokyo on December 25, 2023, UEDA Kazuo, theBank of Japan's Governor at the time, provided insights into Japan's economicprogress. He mentioned that his predecessor had previously identified a crucialturning point for Japan as it moved past its prolonged period of low inflationand growth. The year 2023 was characterized by a gradual economic upturn,facilitated by easing supply-side limitations and a closing output gap, whichresulted in inflation consistently exceeding 2%. This inflationary trend waslargely driven by the rollover effects of previous hikes in import prices onconsumer pricing, coupled with changes in how companies approach wage andpricing strategies, indicating a shift away from the long-standing era of lowinflation toward achieving the Bank's 2% inflation target.
Kazuo provided ahistorical overview, contrasting the current economic climate with the late1990s when Japan was caught in a cycle of stagnant wages and prices. He pointedout that the current global pricing pressures were compelling companies torevise their pricing models. Despite facing recent hurdles like the COVID-19pandemic and geopolitical conflicts that disrupted supply chains and commodityprices, Kazuo remained positive about Japan moving beyond its low-inflationphase, supported by governmental economic policies and monetary relaxation.
He projected afuture where an upward spiral of wages and prices would enhance theeffectiveness of monetary policy, improve resource distribution, and boosteconomic efficiency. Kazuo acknowledged the challenges businesses mightencounter in this changing environment but highlighted the advantages of a moredynamic wage and price setting. In closing, he reiterated the Bank's dedicationto keeping a close watch on economic trends and the interplay between wages andprices, with the goal of reaching the 2% inflation target in a sustainablemanner, reflecting a cautiously optimistic stance on Japan's economicprospects.
TL;DR
- UEDA Kazuo, the Governor of the Bank of Japan, discussed Japan's economic progress in a meeting with the Keidanren in Tokyo on December 25, 2023, highlighting a move past a long period of low inflation and growth.
- The year 2023 saw a gradual economic upturn, driven by easing supply-side constraints and a closing output gap, resulting in inflation consistently above 2%.
- The inflationary trend was attributed to rollover effects of previous import price increases on consumer prices and a shift in corporate wage and pricing strategies, indicating a move towards the Bank's 2% inflation target.
- Kazuo contrasted the current economic situation with the late 1990s, noting that global pricing pressures are now prompting companies to revise their pricing models.
- Despite challenges such as the COVID-19 pandemic and geopolitical conflicts affecting supply chains and commodity prices, Kazuo remained optimistic about Japan's economic future, supported by government policies and monetary easing.
- He envisioned a future with an upward wage and price spiral, enhancing monetary policy effectiveness, resource distribution, and economic efficiency, while acknowledging the challenges businesses may face in adapting to this change.
- Kazuo closed by reaffirming the Bank's commitment to monitoring economic trends and the wage-price relationship, aiming for a sustainable achievement of the 2% inflation target, reflecting a cautiously optimistic outlook for Japan's economy.
Governor Ueda's address at the Bank of Japan is set for Tuesday at 4:00AM GMT.
USD - ISM Services PMI
The diffusionindex in question, derived from surveys conducted with purchasing managersoutside the manufacturing sector, is released monthly on the third business dayfollowing the conclusion of the month. An index value above 50.0 signifiesexpansion within the industry, whereas a value below 50.0 indicatescontraction. Notably, the methodology for this index was adjusted toincorporate seasonal adjustments starting from January 2001, and furthermodifications were made to the calculation formula in February 2008. This indexis highly regarded by traders and analysts as a leading economic indicator. Therapid response of businesses to market conditions is captured through theinsights of purchasing managers, who offer a contemporaneous and informedperspective on the economic outlook of their companies. The survey encompassesapproximately 300 purchasing managers, querying them on various aspects ofbusiness conditions such as employment, production, new orders, prices, supplierdeliveries, and inventories, thereby providing a comprehensive view of thebusiness landscape.
In January 2024,the services sector witnessed significant growth, marking its 13th consecutivemonth of expansion, as revealed by the latest Services ISM Report On Business.The Services PMI® surged to 53.4 %, up from the prior month's seasonallyadjusted 50.5 %, signalling a robust rebound from a slight contraction inDecember 2022, which was the first since May 2020. The growth was driven by keymetrics such as the Business Activity Index, which held steady at 55.8 %, andthe New Orders Index, which climbed to 55 %, reflecting a renewed increase indemand. The Supplier Deliveries Index also rose to 52.4 %, indicating adeceleration in supplier deliveries amid an improving economy. Despite facingheadwinds from inflation and geopolitical uncertainties, the services sectorremains positive, supported by the prospect of interest rate reductions andstable business conditions. Anthony Nieves of the Institute for SupplyManagement provided the report, emphasizing the sector's enduring resilienceand its pivotal contribution to the overall economic framework.
TL;DR
Metric
Value (Jan 2024)
Remarks
1 Services PMI®
53.4%
Up from 50.5% the previous month, marking 13th month of expansion.
2 Business Activity Index
55.8%
Held steady, indicating strong business operations.
3 New Orders Index
55%
Increased, showing a rise in demand.
4 Supplier Deliveries Index
52.4%
Rose, signifying a slowdown in supplier deliveries amid an improving economy.
5 General Observations
6 Consecutive Expansion
13 months
Continuous growth since a contraction in Dec 2022.
7 Economic Conditions
Improving
Despite challenges from inflation and geopolitical uncertainties.
8 Sector Outlook
Positive
Supported by potential interest rate reductions and stable business conditions.
The upcoming ISM Services PMI reportis set to be published on Tuesday at 3:00 PM GMT.
The forecast forthe ISM Services PMI is predicting a slight dip to 52.5, downfrom the previous reading of 53.4.
