MNI POLICY: BOJ Sees Resilient Spending Able To Weather Hike

The Bank of Japan believes private consumption has remained resilient despite rising goods and services prices, supported by household savings and front-loaded spending, suggesting any subsequent slowdown is likely to be limited and unlikely to derail its gradual rate-hike path, MNI understands.

Increasing purchases of durable goods, particularly air conditioners, alongside non-durable daily necessities have lifted overall consumption, according to government and BOJ data.

But Bank officials have confirmed through anecdotal evidence and other information that front-loaded demand has also boosted recent consumer spending, complicating efforts to gauge the underlying strength of household consumption. Unlike the surge in spending ahead of previous consumption tax hikes, however, the latest bout of front-loaded demand appears relatively modest and officials are closely monitoring when and to what extent the subsequent pullback will weigh on private consumption as they assess the economy's ability to withstand further interest-rate hikes.

MNI reported this week that the Bank would prefer to gauge inflation expectations in the September Tankan, due Oct. 1, before raising rates again, unless a sharp weakening of the yen prompts earlier action. (See MNI POLICY: BOJ To Eye Expectations Ahead Of Additional Hike)

PASS THROUGH

Officials expect consumer inflation to accelerate as firms pass higher costs on to consumers from around July onward, weighing further on real wages and eroding households' purchasing power.

The pass-through of higher costs is occurring more quickly than in previous inflation cycles, while the weaker yen is exerting a greater upward influence on prices, prompting the BOJ to remain vigilant over inflation risks and their potential impact on household spending.

Although real wages have remained positive, officials expect real-wage growth to slow and potentially turn negative, putting renewed downward pressure on private consumption. Inflation-adjusted real wages, a key gauge of households' purchasing power, rose 1.4% y/y in May after increasing 2.0% in April, marking a fifth consecutive monthly gain, government data showed.

MNI POLICY: BOJ To Eye Expectations Ahead Of Additional Hike

The Bank of Japan believes it has time to assess the impact of June's rate increase on economic activity and financial conditions while monitoring whether corporate inflation expectations continue to strengthen, making the period after the September Tankan survey, due Oct. 1, the more likely opportunity for another rate hike, provided the yen remains broadly stable, MNI understands.

Officials judge the risk of underlying CPI overshooting its 2% target has not increased significantly despite firms reporting stronger inflation expectations, allowing policymakers to avoid rushing into another rate hike, following June's 25 basis point increase to 1%. (See MNI BOJ WATCH: Uchida Flags More Hikes; No Timing Hint)

June's Tankan showed companies expected consumer prices to rise 2.7% annually, up from 2.6% in March. They also projected inflation of 2.6% three years ahead and 2.6% five years ahead, both up from 2.5%. The BOJ views this increase as consistent with the moderate upward trend anticipated in its April Outlook Report, and does not view this gradual rise accelerating at a pace that would prompt immediate policy action.

Officials attribute part of the increase in inflation expectations to higher crude oil prices and want to confirm whether those expectations remain elevated when updated within the September Tankan, following the subsequent decline in oil prices.

However, should fresh risks emerge, such as a further weakening of the yen, pressure would increase on the BOJ to raise the policy rate before completing its assessment. (See MNI POLICY: Weak Yen Adds Risk To BOJ's Policy Direction)

OIL PRICE VOLATILITY

Although crude oil prices rebounded following renewed tensions in the Middle East, they remain below levels prevailing at the time of the June meeting, when policymakers discussed considerable upside risks to prices. Officials therefore want to determine whether the rise in corporate inflation expectations proves durable or reflects a temporary shock.

The BOJ expects the pass-through of higher business costs seen in recent months to feed into consumer prices with a lag, although the extent to which firms can fully pass on costs remains uncertain. Progress in securing alternative sources of raw materials previously dependent on Middle Eastern supplies has reduced downside risks to the economy.

However, diversifying supply chains has increased corporate costs, adding pressure on firms to raise selling prices and potentially sustaining inflationary pressures, partly offsetting the disinflationary effect of lower crude oil prices. 

While median forecasts for core CPI and core-core CPI in fiscal 2026 could be revised slightly higher from the April projections of 2.8% and 2.6%, any upward revision is unlikely to alter the BOJ's assessment of underlying inflation materially or trigger an imminent rate hike.

MNI INTERVIEW: Resilience Keeps BOC On Hold- Ex Adviser Ragan

The Bank of Canada has good reason to keep interest rates on hold for a while because the economy is showing resilience to shocks from oil inflation and U.S. tariffs that helps moderate inflation and are outside the easy reach of monetary policy, former adviser Chris Ragan told MNI.

"There's been a bit of a surprise at how resilient the Canadian economy has been, even during this sort of weak time," said Ragan, a McGill University professor who has also served as a special adviser to Canada's finance department. 

"I think he wants to avoid getting pushed into really low rates again, from which he'd have to come back," Ragan said of Macklem's views. "He kind of wants to get to normal."

Canada's GDP stalled in the first quarter after shrinking in the fourth but Governor Tiff Macklem held the key rate at 2.25% Wednesday and boosted this second quarter growth call by a full percentage point to 2.5%. The Bank has a single mandate to keep inflation at 2% and its new forecast also showed things normalizing with headline price gains seen slowing from about 3% now back to target early next year.

KEEPING CREDIBILITY

"The Bank is basically at the low end of its suggested range for the neutral rate, so I think you've got a pretty good argument for Tiff to just say, yeah, we're just not going to do much," Ragan said. (See: MNI INTERVIEW: BOC Can Delay Hike To Neutral Til 2027-Mc Mahon)

“The oil prices are caused by a supply disruption in the Middle East, that's clearly not directly fixable by monetary policy, and I think a pretty good argument is that most of the Canadian weakness is caused by trade and tariff uncertainty, and that's not directly fixable by monetary policy,” Ragan said.

The latest rate decision dropped earlier signals about potential for either consecutive hikes or a cut, returning to an earlier view that the overnight rate is about right to rebalance the economy. The Governor later told reporters consecutive hikes could be needed if there is another bump in oil prices. 

“The Bank has to just keep enforcing that credibility, and you do that by saying, 'Okay, we're prepared to raise rates, you know, when we have to,'" Ragan said. Part of the reason price expectations have been contained so far is the long-run credibility officials won after painful past fights to curb excessive price growth, he said. 

MANDATE REVIEW

The Bank of Canada has a mandate review later this year and unlike Fed Chair Kevin Warsh's signals of a big overhaul Macklem this time has limited the scope of questions, citing a consensus about the job to be done. 

While the broad strokes are right Macklem needs to remove language added last time about seeking higher employment when the inflation mandate is set, Ragan said. The last five-year agreement was made in tandem former finance minister Chrystia Freeland and Ragan said that agreement had "some deep incoherence." 

One change Macklem has signaled is adding language about a world more prone to supply shocks, which Ragan said is worthwhile. 

“If it is true that we are in a world of greater frequency and maybe even a greater average size of supply shocks, then okay, monetary policy is going to be harder," Ragan said. "I don't think it's an argument for adding in stuff about maximum employment.”

Another looming shock is Prime Minister Mark Carney's plans to meet the NATO target where 5% of GDP is spent on defense, up from less than 2% in recent decades. Carney has said that will happen over the next decade. "We should absolutely expect that as this big fiscal expansion happens over the next few years, that will tend to push up interest rates higher than they would otherwise be," Ragan said. 

MNI INTERVIEW: UK TLFS Timeline Update In August - ONS Benford

The UK Office for National Statistics has made progress improving its surveys and economic data, but there is still work to do, not least putting quality of output ahead of quantity, a senior official told MNI on Wednesday.

Since April, the ONS has "focused on the areas that matter most for the quality and trustworthiness of our statistics," James Benford, Director General, Surveys and Economic Statistics said in an interview.

But the main priority remains progressing the Transformed Labour Force Survey (TLFS) to become the main headline measure for labour market statistics at some point in 2027, said Benford, who also serves as the Deputy National Statistician, adding that a readiness assessment would soon be completed.

"We will set out an indicative timeline in August for how things proceed from here on the TLFS. It's a complex journey, but we will show set out the timeline," he said, with a "final go/no go type decision in 2027 on that timeline".

DATA CONCERNS

The quality of UK labour data has been widely questioned for some years now, with policymakers and legislators all unhappy with its reliability, and the ONS announced the introduction of the new TLFS in 2023. (see MNI INTERVIEW: UK Labour Force Survey Now Improved )

Benford, who was hired from the Bank of England, where he held a senior role as Chief Data Officer, noted that the update on wider ONS improvements published on Wednesday went into little detail on the labour data changes, as there would be a bigger window in August.

"We're doing the ready testing now, and that's a process that involves our users and a stakeholder panel, and it then passes to the (Executive Committee) at the ONS, and then it goes to the UKSA board and then we publish [in August]," he said.

"Survey changes have had the desired effects and the response rates have risen -- pretty much risen in line with what we've been targeting operationally, so that's really encouraging," he noted.

INPUT DATA ERRORS

Following ONS errors in recent years that were a direct result of erroneous data collected by other other official agencies, Benford said there has been a collaborative exercise across government to tighten up output. 

The ONS "sits across many different data sets and has a key role drawing people together across the system. This has been collaborative exercise, making sure the right checks and balances are there," Benford said. 

"There's a lot that we can do, and we'll be bringing all of that work to the UK Statistics Authority Board, probably in September," he added.

MNI INTERVIEW: Germany To Lose 30% Industry Jobs In 10 Years

Volkswagen’s plan to cut 100,000 jobs and close four factories highlights the “unsustainable” nature of Germany’s car sector, with the country set to lose around a third of all industrial jobs over the next 10 years, a leading labour economist told MNI. 

The plan - rejected this week by the company’s Board - is both unlikely to save the company on its own and suggests that well paid, highly unionised work is at risk from Germany’s ailing economic model, with autos among those sectors most exposed, Werner Eichhorst said in an interview.

“I've talked to several people in the metal working industry, including electrical and mechanical engineering over the last few months, and I think there's a basic understanding that the size of the automotive sector, including its suppliers, is not sustainable in Germany,” Eichhorst said. (See MNI INTERVIEW: EU Needs 'Credible Threat' Against China)

VW was Germany’s biggest auto manufacturer by market share last year, but has lost ground in recent years to Chinese firms in particular, unable to compete on price, beset by overcapacity in some market sectors, and lagging in innovation and technological advancement, Eichhorst said.

The same holds for the network of companies which supply Germany’s big auto makers,  said Eichorst, research fellow at the Institute of Labour Economics (IZA) at the Luxembourg Institute of Socio-Economic Research and honorary professor for European Labor Market Policy at the University of Bremen.

SLOW GO ON EVS

Germany’s “lukewarm” embrace of electric vehicles and partial and delayed development of batteries means the situation may be even worse for niche suppliers that have focused on a combustion engine vehicle model that has been running for decades, he said.

Manufacturers and suppliers have also burned through capital in the name of diversification in recent years, he said, resulting in added scale and complexity while failing to produce an affordable electric vehicle, with France now closer to doing so.

A scattergun approach of this sort by VW- along with the composition of the Board, which also includes union representatives, local politicians and Porsche family members -  partially explains the high turnover rate among the company’s leaders, Eichhorst said, and while it will exist in 10-20 years, “it will be much smaller, and maybe it will be taken over by other companies.”

Mercedes and BMW are not similarly handicapped, but their focus on luxury markets - even if successful - also implies a shrinking labour force, Eichhorst said.

Germany can compete in industries employing the latest technology, such as industrial AI and automation technology, medical technology and green energy, defence, packaging, he said, but at the cost of more jobs.

“In some of those areas regional or the national production networks are still working well, and can hardly be relocated or imitated in China with the same level of reliability, quality, and innovation - for the time being. But it does mean that in the next five to 10 years we will lose around a third of today’s industrial jobs.”

Nor is AI a cure-all for weak productivity, he cautioned.

“Some [firms] are more innovative because they have a different work culture, a more open-minded organisation, less bureaucracy. So firms need to reorganise themselves on the one hand, and on the other retrain and consult and include also the view of workers,” he said.

ECONOMIC REFORMS

Planned government reforms to the health sector and pensions will add to non-wage labour costs, with likely changes to unemployment insurance and old age care contributions equally unlikely to be offset by tax relief measures, Eichhorst said. (See MNI INTERVIEW: German Pensions Model For EU Reform - Rocholl)

Labour market changes, such as reduced employment protection for high wage earners and fixed-term contracts, may add some flexibility and incentivise innovation, but are “largely symbolic and won't change the whole environment, nor will they lift the whole economy,” he added.

Eichhorst expressed “surprise” that leading figures from the centre-left Social Democratic Party have so far embraced all the measures recommended, despite their widespread unpopularity.

“That suggests to me that the mobilisation against them from the SPD, or maybe potentially also from the trade unions, may be a bit symbolic," he said. "So the positive story is that it seems now there is an acknowledgment that the problem is too big, and pressure to act too great, to be ignored anymore.”

MNI BOC WATCH: Macklem Shifts Back To Say Rate Is Appropriate

The Bank of Canada held its key lending rate at 2.25% Wednesday as expected while reverting back to a view monetary policy is in the right place to balance the risk of oil inflation spreading against another potential export stall amid steep U.S. tariffs. 

"Governing Council judges the current policy rate remains appropriate to sustain the economic recovery and bring inflation back to the 2% target," according to a statement by Governor Tiff Macklem and his deputies. Officials are "prepared to adjust monetary policy as needed" to maintain confidence in price stability, the statement said. 

Gone from the decision were earlier comments about the potential for consecutive hikes if inflation spreads from the high oil prices caused by the Iran war, and a potential cut if there is major new damage from the U.S. trade conflict. (MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber)

Officials on Wednesday said while they have been looking through the early inflation pickup from oil the risk of CPI sticking above the 2% target increases the longer energy prices are elevated. At the same time, the Bank said "the recovery in exports could stall" and that kind of weakness "would put more downward pressure on inflation."

Inflation will come in around 2.5% in the second half of the year and return to target early next year the Bank said based on its latest assumptions around crude oil futures. The decision also noted inflation excluding gasoline has been tame and core measures are seen remaining around 2%.

There are clear signs the economy is rebounding after GDP stalled in Q1 with the Bank lifting its Q2 forecast by a percentage point to 2.5% annualized. Weakness earlier this year led the Bank to cut 2026 growth to 0.7% from 1.2%. 

“Recent data suggest that the economy is evolving broadly in line with the outlook in the April Report, increasing confidence that households and businesses are navigating this period of global upheaval,” the Bank's economic forecast paper said. It will take time for slack in the economy to be absorbed, officials said. 

Canada's dollar has weakened lately and that should boost exports, the Bank said. The weaker currency can also add some inflation pressure by making imports more expensive. 

MNI: China's Small Banks Hit As Old Economic Sectors Struggle

The poor performance of China’s traditional economic sectors such as property and infrastructure is putting pressure on small and medium-sized banks, prompting regulators to push for consolidations and restructuring, economists and policy advisors told MNI.

While China’s fast-growing high-tech industries are served by the bigger banks, smaller and mid-sized lenders which depend on now-stagnant sectors are struggling to cope with rising non-performing loans and weakening credit demand, advisors said, speaking after Zhongbang Bank underwent the first regulatory receivership since Baoshang Bank in 2019.

Zhongbank was established in 2017 in Hubei province, and specialised in retail lending to small businesses and households. It was the first of China’s 19 private lenders to be taken over, after it "experienced severe credit risks," according to the National Financial Regulatory Administration.

Authorities will push for consolidation and boosts to capital, and in some cases resolution, among small-to-mid-sized lenders, said Song Ke, deputy director of the China Banking Research Center at Renmin University of China. NFRA data shows those banks account for up to 30% of China’s total CNY410 trillion in banking assets.

CAPITAL NEEDS

Capital boosts provided by issuance of local government special bonds have so far been insufficient, Song said, adding that raising capital via private placements or issuance of Tier-2 or perpetual bonds is challenging. Li Keying, a senior analyst at Orient Golden Credit Rating International, noted that obtaining issuer credit ratings can be tough for some smaller lenders, whose financial disclosures have been delayed, with incomplete information on large exposure risks. (See MNI INTERVIEW: PBOC Must Stoke Inflation, Target 4% CPI)

Capital Adequacy Ratios at some banks in economically weaker regions may already approach regulatory minima, according to Elaine Xu, director of Asia-Pacific Financial Institution at Fitch Ratings. Consolidation among those institutions which survive would be insufficient to solve their problems, and their profitability and ability to provide credit is likely to remain constrained, Xu said.

Together with exposure to funding vehicles operated by the local governments which control many of the banks, lenders have to contend with property loans and unsecured retail lending, part of which have also likely gone bad, Xu said.

The biggest challenge for resolving risks at regional banks is disposing of non-performing assets, given constraints posed by low provision coverage ratios and narrowing net interest margins, according to Song. Non-performing loan ratios for credit cards and personal business loans jumped between 2024 and 2025, with unsecured retail lending accounting for more than half of NPLs transferred via bank auctions in Q1, he said.

At the end of 2026 Q1, the average non-performing loan ratio for rural commercial banks reached 2.79%, while it was 1.85% for city commercial banks and 1.51% for commercial banks, according to the NFRA.

The jump in bad credit card loans comes as consumers’ income expectations fall, said Li, though she added that the outlook was better for mortgages, due to high downpayment requirements and homeowners’ traditional reluctance to default.

PROPERTY A DRAG

Property remains the primary source of pressure on banks, sapping both repayments and the value of collateral, said Liu Ying, fellow at the Chongyang Institute for Financial Studies, who argues that the government should consider additional measures in the second half of this year, including increasing official purchases of unsold properties in order to meet the housing needs of younger Chinese and reducing mortgage rates. Authorities could also include measures such as tax relief and supporting deferred loan repayments by small and micro enterprise borrowers, Liu said. (See MNI INTERVIEW: China Property Bailout Would Take 10% Of GDP)

Smaller banks rely on internet platforms for some of their retail lending, and their risk management capabilities are limited, Liu noted, adding that retail non-performing loan rates may not yet have hit their peak.

While their retail customers struggle, smaller and medium-sized banks are failing to attract more corporate clients. Smaller companies are generally rolling over existing loans without fresh borrowing, and small banks tend to lack the underwriting qualifications, market-making capabilities, and professional expertise required to support bond or equity financing by high-quality large firms, which are reducing their reliance on bank loans, Li said.

Still, on the positive side, net interest margins should have limited room to fall further, thanks to restrictions on high-yield deposits and as the pace of policy rate cuts has slowed, according to Li.