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Trauma of Japan’s deflation battle keeps BOJ wary of policy shift

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Japan’s bitter memories of its decades-long battle with deflation hang heavily over the central bank’s deliberations to take its first modest step away from ultra-loose monetary policy, even as inflation and wages creep up.

The appointment of Kazuo Ueda as Bank of Japan (BOJ) governor this year and mounting price pressures have fired up market chatter that the new chief might hasten an exit from the bold stimulus of his predecessor Haruhiko Kuroda.

But uncertainty over the wage outlook and emerging global economic weakness heighten the chance the BOJ will hold off tweaking its controversial yield curve control (YCC) policy at least until autumn, say three sources familiar with its thinking.

“In a country that has seen interest rates stay ultra-low for two decades, the shock of the BOJ’s first move could be enormous,” said one of the sources. “That’s enough to make the BOJ cautious.”

Japan has not seen interest rates rise since 2007, when the BOJ hiked short-term rates to 0.5% from 0.25% in a move later criticised for delaying an end to price stagnation.

Having taken part in Japan’s battle with deflation as BOJ board member from 1998 to 2005, Ueda knows all too well the danger of a premature exit from ultra-loose policy.

Wary of a wobbly recovery, he opposed the BOJ’s decision in 2000 to raise short-term rates to 0.25% from zero.

The bank drew significant political heat for that tightening and was forced to reverse course just eight months later and adopt quantitative easing.

Given the trauma of such ill-timed policy shifts, caution will be Ueda’s priority, the sources say, suggesting an end to YCC, which caps the 10-year bond yield around zero, could be some time away. That would mean more significant policy changes are even further down the track.

“Tweaking the yield cap alone may not do much harm to the economy, as long as short-term rates are kept low,” one of the sources said. “But the BOJ’s long, historical struggle with deflation can’t be taken lightly.”


One key difference between the BOJ’s and the market’s thinking lies in Japan’s inflation outlook. On the surface, conditions for phasing out a portion of the BOJ’s massive stimulus appear to be falling in shape.

Core consumer inflation hit 3.4% in April, holding above the BOJ’s 2% target for over an year, as companies continued to hike prices for a broad range of goods and services. Companies offered pay hikes not seen in three decades in this year’s wage talks with unions, heightening hope of a sustained rise in pay after decades of stagnant wage growth.

With robust domestic demand offsetting some of the external headwinds, the BOJ is widely expected to raise this year’s inflation forecasts at its next quarterly review in July.

But inflation is now less of a trigger for an exit than it was in the past, as policymakers focus on risks that could again upend the path toward a sustained recovery.

“If you know the U.S. economy could slow sharply due to aggressive rate hikes in the past, it’s natural for the BOJ to be cautious about phasing out stimulus,” a third source said.

Weakness in China, a major market for Japanese manufacturers, also casts doubt over whether companies can reap enough profits to sustain wage hikes next year.

To be sure, Ueda has left scope to tweak YCC in case inflation continues to overshoot the BOJ’s forecasts. At his debut policy meeting in April, he removed guidance pledging to keep rates at “current or lower levels.”

In a group interview last month, Ueda said the BOJ could tweak YCC “if the balance between the benefit and cost of our policy shifts.”

With Kuroda’s massive stimulus having failed to re-anchor inflation expectations around the BOJ’s target, however, Ueda has good reason to be cautious.

Ueda last month said eradicating Japan’s entrenched deflationary mindset remained a difficult challenge and warned moving too quickly on rates was more dangerous than not moving fast enough.

“The cost of waiting for underlying inflation to rise until it can be judged that 2% inflation has fully taken hold is not as large as the cost of making hasty policy changes,” he said.


Fed’s Powell: Economy still working through the impact of the pandemic

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Fed's Powell: Economy still working through the impact of the pandemic
© Reuters. FILE PHOTO: U.S. Federal Reserve Chair Jerome Powell holds a press conference in Washington, U.S, September 20, 2023. REUTERS/Evelyn Hockstein/File Photo

By Howard Schneider

YORK, Pa. (Reuters) – The U.S. economy is still dealing with the aftermath of the COVID-19 pandemic, Federal Reserve chair Jerome Powell said during a meeting with community and business leaders in York, Pennsylvania.

“We are still coming through the other side of the pandemic,” Powell said, noting labor shortages in healthcare, ongoing difficulties with access to child care, and other issues heightened by the health crisis. He did not comment on current monetary policy or the economic outlook in brief opening remarks.

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Credit Suisse, Mozambique secure out-of-court ‘tuna bond’ settlement

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Credit Suisse, Mozambique secure out-of-court 'tuna bond' settlement
© Reuters. FILE PHOTO: The logo of Credit Suisse is seen outside its office building in Hong Kong, China, August 8, 2023. REUTERS/Tyrone Siu/File Photo

By Noele Illien and Kirstin Ridley

ZURICH (Reuters) -Credit Suisse has reached an 11th-hour out-of-court settlement with Mozambique over the decade-old $1.5 billion-plus “tuna bond” scandal, the Swiss bank’s new owner UBS said on Sunday, drawing a line under a damaging dispute it inherited.

“The parties have mutually released each other from any liabilities and claims relating to the transactions,” UBS said in a statement. “The parties are pleased to have resolved this long-running dispute,” it added without giving further details.

Under the deal, struck one day before a three-month London civil trial was due to start, UBS will forgive part of a loan that Credit Suisse made to Mozambique in 2013, representing less than $100 million, said one source familiar with the situation, who declined to be named because the terms are not public.

In Maputo, the Mozambican Attorney General’s Office and Ministry of Economy and Finance said they were calling a joint news conference for Monday morning.

The tuna bond case dates back to deals between state-owned Mozambican companies and shipbuilder Privinvest – funded in part by loans and bonds from Credit Suisse and backed by undisclosed Mozambican government guarantees in 2013 and 2014 – ostensibly to develop the fishing industry and for maritime security.

But hundreds of millions of dollars went missing and, when the government debt came to light in 2016, donors such as the International Monetary Fund temporarily halted support, triggering a currency collapse, defaults and financial turmoil.

The settlement included most of the creditors involved in funding a 2013 loan to ProIndicus, a state-owned Mozambican company, UBS said.


UBS, which took over scandal-scarred Credit Suisse amid turmoil in the global banking sector earlier this year, has pledged to resolve Credit Suisse’s legacy legal disputes.

Since completing the mega merger on June 12, it has paid $388 million to U.S. and British regulators over dealings with collapsed private investment firm Archegos Capital Management and settled a dispute with a finance blog.

The latest settlement leaves French shipping mogul Iskandar Safa and his Privinvest group among key remaining defendants in a High Court battle over the funding and maritime deals that have already triggered U.S. and Mozambican criminal proceedings.

Mozambique has alleged it was the victim of a conspiracy and that Privinvest paid bribes to corrupt Mozambican officials and Credit Suisse bankers, exposing the country to a potential liability of at least $2 billion.

Privinvest has alleged it delivered on all of its obligations under the contracts and that any payments it made were either investments, consultancy payments, legitimate remuneration or legitimate political campaign contributions.

The company did not immediately respond to a request for comment.


In another twist to the complex case, Privinvest on Friday secured permission to appeal against a London High Court decision to grant Mozambican President Filipe Nyusi immunity from the proceedings. Privinvest has argued that if it is found liable, Nyusi should contribute to any damages.

Officials in the Maputo government did not immediately respond to a request for comment.

Court of Appeal Judge Elizabeth Laing said it was now up to the trial judge to grant any applications for adjournment, a decision seen by Reuters over the weekend showed.

In 2021, Credit Suisse agreed to pay about $475 million to British and U.S. authorities to resolve bribery and fraud charges and has pledged to forgive $200 million of debt owed by Mozambique.

It has alleged three former bankers, who arranged the bonds and have pleaded guilty in the United States to handling kickbacks, hid their misconduct from the bank.

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US Congress averts government shutdown, passing stopgap bill

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US Congress averts government shutdown, passing stopgap bill
© Reuters. U.S. House Speaker Kevin McCarthy (R-CA) speaks with reporters after a House Republican conference meeting following a series of failed votes on spending packages at the U.S. Capitol ahead of a looming government shutdown in Washington, U.S. September 29,


By David Morgan, Moira Warburton and Makini Brice

WASHINGTON (Reuters) -The U.S. Congress passed a stopgap funding bill late on Saturday with overwhelming Democratic support after Republican House Speaker Kevin McCarthy backed down from an earlier demand by his party’s hardliners for a partisan bill.

The Democratic-majority Senate voted 88-9 to pass the measure to avoid the federal government’s fourth partial shutdown in a decade, sending the bill to President Joe Biden, who signed it into law before the 12:01 a.m. ET (0401 GMT) deadline.

McCarthy abandoned party hardliners’ insistence that any bill pass the House with only Republican votes, a change that could cause one of his far-right members to try to oust him from his leadership role.

The House voted 335-91 to fund the government through Nov. 17, with more Democrats than Republicans supporting it.

That move marked a profound shift from earlier in the week, when a shutdown looked all but inevitable. A shutdown would mean that most of the government’s 4 million employees would not get paid – whether they were working or not – and also would shutter a range of federal services, from National Parks to financial regulators.

Federal agencies had already drawn up detailed plans that spell out what services would continue, such as airport screening and border patrols, and what must shut down, including scientific research and nutrition aid to 7 million poor mothers.

“The American people can breathe a sigh of relief: there will be no government shutdown tonight,” Democratic Senate Majority Leader Chuck Schumer said after the vote. “Democrats have said from the start that the only solution for avoiding a shutdown is bipartisanship, and we are glad Speaker McCarthy has finally heeded our message.”


Some 209 Democrats supported the bill, far more than the 126 Republicans who did so, and Democrats described the result as a win.

“Extreme MAGA Republicans have lost, the American people have won,” top House Democrat Hakeem Jeffries told reporters ahead of the vote, referring to the “Make America Great Again” slogan used by former President Donald Trump and many hardline Republicans.

Democratic Representative Don Beyer said: “I am relieved that Speaker McCarthy folded and finally allowed a bipartisan vote at the 11th hour on legislation to stop Republicans’ rush to a disastrous shutdown.”

McCarthy’s shift won the support of top Senate Republican Mitch McConnell, who had backed a similar measure that was moving through the Senate with broad bipartisan support, even though the House version dropped aid for Ukraine.

Democratic Senator Michael Bennett held the bill up for several hours trying to negotiate a deal for further Ukraine aid.

“While I would have preferred to pass a bill now with additional assistance for Ukraine, which has bipartisan support in both the House and Senate, it is easier to help Ukraine with the government open than if it were closed,” Democratic Senator Chris Van Hollen said in a statement.

McCarthy dismissed concerns that hardline Republicans could try to oust him as leader.

“I want to be the adult in the room, go ahead and try,” McCarthy told reporters. “And you know what? If I have to risk my job for standing up for the American public, I will do that.”

He said that House Republicans would push ahead with plans to pass more funding bills that would cut spending and include other conservative priorities, such as tighter border controls.


The standoff comes just months after Congress brought the federal government to the brink of defaulting on its $31.4 trillion debt. The drama has raised worries on Wall Street, where the Moody’s (NYSE:) ratings agency has warned it could damage U.S. creditworthiness.

Congress typically passes stopgap spending bills to buy more time to negotiate the detailed legislation that sets funding for federal programs.

This year, a group of Republicans has blocked action in the House as they have pressed to tighten immigration and cut spending below levels agreed to in the debt-ceiling standoff in the spring.

The McCarthy-Biden deal that avoided default set a limit of $1.59 trillion in discretionary spending in fiscal 2024. House Republicans are demanding a further $120 billion in cuts.

The funding fight focuses on a relatively small slice of the $6.4 trillion U.S. budget for this fiscal year. Lawmakers are not considering cuts to popular benefit programs such as Social Security and Medicare.

“We should never have been in this position in the first place. Just a few months ago, Speaker McCarthy and I reached a budget agreement to avoid precisely this type of manufactured crisis,” Biden said in a statement after the vote. “House Republicans tried to walk away from that deal by demanding drastic cuts that would have been devastating for millions of Americans. They failed.”

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