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BOJ Governor Sticks to Stance on More Rate Hikes Despite U.S. Uncertainty

The central bank said it would closely monitor economic measures by President-elect Donald Trump

NAGOYA, Japan—The Bank of Japan’s governor affirmed that the door remains open to more rate hikes, saying they could come before clarity emerges on U.S. economic policy, even as he carefully avoided giving any clear hints on the timing of the central bank’s next move.

“There are countless uncertain and changing factors, including the U.S. economy. Rather than waiting for clarity on all of them, we will make appropriate policy decisions, looking at data and other information available by each policy meeting,” Kazuo Ueda said at a news conference Monday after speaking to business leaders in Nagoya, central Japan.

While the BOJ head said the bank would closely monitor economic measures by President-elect Donald Trump, he refrained from offering his views on their potential impact on the global economy.

Since Trump was elected as the next U.S. leader earlier this month, speculation over his policy, such as additional tariffs on foreign-made goods, has shaken the financial markets.

The dollar has strengthened on expectations that higher tariffs could accelerate inflation by increasing prices of goods imported into the U.S, sending the yen to its weakest point in nearly four months.

Given the yen’s sharp weakening, some economists expect the BOJ to raise interest rates as soon as at its next policy-setting meeting on Dec. 18-19. A weak yen raises inflationary pressures as Japan depends largely on imports of food and energy.

A local business leader attending the meeting with the BOJ governor on Monday asked the central bank to consider the stability of the currency market when making policy decisions because the yen’s depreciation has had negative effects on companies by raising the cost of importing raw materials and energy.

Stabilizing foreign-exchange rates is not a direct mandate of the Japanese central bank. But Ueda said the bank would closely examine how the yen’s weakness will affect the bank’s price outlook.

Higher costs for Japanese firms could be especially concerning if they are unable to pass those costs on to consumers. Many companies in the country have so far been reluctant to sharply raise prices but there are some signs that this is starting to change.

In his morning speech, Ueda reaffirmed the bank’s stance of continuing to raise interest rates as long as the economy improves as expected.

“The actual timing of the adjustments will continue to depend on developments in economic activity and prices as well as financial conditions going forward,” Ueda said.

“Gradually adjusting the degree of accommodation in line with improvement in economic activity and prices will support long-term economic growth and contribute to achieving the price stability target in a sustainable and stable manner,” he added.

The governor said that whether overseas economies grow moderately and whether wages in Japan continue to rise hold the key to the bank’s economic outlook.

Although Ueda didn’t give a strong hint that a December rate increase is coming, he emphasized the need for gradual monetary tightening.

Given that real interest rates remain very low, he sees a risk that underlying inflation rate could at some point exceed the central bank’s 2% target.

“If that happens, we may have to raise interest rates at a faster-than-expected pace. We will appropriately adjust the degree of monetary easing to avoid such a situation,” Ueda said.

ECB split over report showing big EU banks’ capital requirements lower than US rivals

Officials say US rules would increase minimum capital levels by double-digit percentage for biggest EU banks

The European Central Bank is debating whether to publish sensitive research showing capital requirements for big EU lenders would rise by a double-digit percentage if they had the same rules as large Wall Street rivals.

Some senior policymakers at the ECB are pushing for it to publish the report, or at least some of its findings, to counter heavy lobbying by the banking sector to water down rules implementing the Basel agreement on global capital requirements in the sector.

The pressure from EU banks is likely to increase if the US dilutes or even abandons plans to impose the Basel rules on its banks amid an expected wave of deregulation following Donald Trump’s victory in this month’s presidential election.

The so-called Basel III package is an ambitious overhaul of bank regulation agreed by supervisors around the world in the wake of the 2008 financial crisis to limit how much lenders can use their own models to make their balance sheets appear stronger than they would otherwise be.

The ECB report, which was completed last year but has never been published, examined what would happen to EU bank capital requirements if they were subjected to current US prudential rules. 

Officials in Frankfurt found that for the biggest EU banks, the application of US rules would increase their minimum capital levels by a double-digit percentage, according to two people briefed on the report.

The biggest lenders in the EU and the US have to meet extra capital requirements based on their systemic importance, and the impact their collapse would potentially have for global finance.

The minimum capital levels for the biggest US banks include a buffer reflecting the Federal Reserve’s annual stress test results and a further surcharge based on their systemic importance, on top of the basic “pillar one” requirements of 4.5 per cent of a lender’s assets, weighted for risk.

Some officials are reluctant to publish the ECB’s findings because they stem from several assumptions that are likely to be challenged by the banking industry. Officials believe those challenges could create counterproductive disputes between the lenders and the central bank’s supervisors.

Others say the report is partly based on confidential data, making publication difficult.

The ECB declined to comment.

The report was compiled to challenge the EU banking industry’s push to show that it already had higher capital levels than its US counterparts, as part of the sector’s lobbying efforts to water down the new rules, which it claims put it at an even bigger disadvantage to American rivals.

The European Banking Federation teamed up with consultants Oliver Wyman to produce a study last year that said the common equity tier one — a routinely used capital benchmark — at larger EU banks over the past three years was on average 3.1 percentage points higher than US rivals. 

One reason EU banks have higher capital ratios is a greater use of their own models, which can be used to downplay the riskiness of their assets. A lower level of these so-called “risk-weighted assets” boosts their relative capital levels.

US banks are restricted in their use of such accounting moves. European banks also hold bigger “management buffers” above their minimum capital requirements than US peers.

The EU law to implement Basel was finalised this year and will be phased in over the next eight years. The European Banking Authority has estimated it will increase minimum capital requirements for large and internationally active EU banks by 8.6 per cent and raise them for the biggest few banks classed as systemically important by 12.2 per cent.

Brussels lawmakers made several concessions to the industry and member states that included watering down capital requirements for small business and mortgage lending, and for banks’ insurance subsidiaries. 

Earlier this year, the Fed cut a proposed increase to capital requirements for the country’s largest banks by more than half to 9 per cent after a massive backlash from the industry and politicians against the so-called “Basel Endgame” rules. 

However, regulators failed to agree on this proposal and now many bank executives are expecting a Trump administration to usher in a largely new regulatory team in Washington who will substantially weaken Basel Endgame or cancel it altogether.

Claudia Buch, chair of supervision at the ECB, told an event in Amsterdam this month that Europe should stick to the plans for implementing the Basel rules whatever the US does. She added that big Wall Street banks already have “significantly higher capital requirements” than their European counterparts.

If China’s statistics can’t be scrutinised, doubts about the economy will only grow

One misleading figure may need to be followed by others, setting the scene for a cycle of misinformation

China’s official statistics, particularly its annual GDP figures, have long been the subject of scrutiny. In 2007, Li Keqiang, later the premier, remarked that they were unreliable and that he relied on three alternative indicators to evaluate economic performance: railway cargo volume, electricity consumption and bank lending. These metrics came to be known as the “Keqiang Index”. 

Many observers suspect that GDP figures in the past few years have been inflated. Local officials tend to view meeting regional targets as necessary not only to keep their jobs but also to secure promotions. This atmosphere of distrust intensified in August 2021 when China’s internet tsar prohibited any social media publications that could “distort” macroeconomic data. Such restrictions have silenced comments from leading economists in China, and several banks and research institutions have become reluctant to publish forecasts which fall below official figures. In some cases, economists have been told to refrain from critiquing official data.

The government’s attempts to suppress negative commentary may stem from concern over the long-term effect of stringent economic controls imposed during the Covid-19 years, which saw investor and consumer confidence decline to what was then an all-time low. This has had a perverse effect: in private conversations, jokes about GDP figures are more widespread than ever.

Publicly available, reliable, up-to-date data allows investors to monitor developments and manage their expectations. If fundamental statistics such as GDP, consumption index and unemployment rates lose their credibility, investors will be forced to prepare for the worst-case scenario. In 2023, China’s National Bureau of Statistics stopped publishing youth unemployment data after figures reached a record high for several consecutive months. The government later resumed the release but excluded students from the count, claiming that this offered a more accurate representation. 

In December 2023, China’s Ministry of State Security warned key commentators on social media to stop criticising the economy and spreading what it alleges to be disinformation. Last month, Zhu Hengpeng, a leading economist at a top government think-tank, reportedly disappeared after making disparaging remarks about the economy in a private WeChat group.

These troubling developments have intensified scepticism about China’s economic reality, creating what could be described as a Tacitus Trap. Named after the Roman historian, this theory posits that when public trust in government erodes, citizens will assume that all information released by government — regardless of its truth — may be false. Some netizens even joke that China owes its recent economic success to the National Bureau of Statistics, the Central Propaganda Department and the Internet Information Office.

This new status quo is neither sustainable nor conducive to long-term growth, as information distortions create a feedback loop which undermines development. One misleading figure may need to be followed by others to preserve the narrative, setting the scene for a self-perpetuating cycle of misinformation.

China has experienced remarkable growth since its accession to the WTO in 2001. Transparency, the rule of law, and objective economic analysis have all been instrumental in enabling the business community to make informed decisions. Given the current size of its economy, a GDP growth rate which falls short of the 5 per cent target should no longer be considered taboo. While some adjustments to economic figures are understandable, excessive exaggeration should not be supported. Open and critical analysis by experts should not only be permitted but encouraged in order to support sustainable economic development.