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In August, Asian bonds experienced their first monthly foreign inflow in three months, driven by expectations of U.S. Federal Reserve rate cuts aimed at supporting a cooling labor market. This development has heightened demand for higher-yielding emerging markets. According to data from regulatory authorities and bond market associations in India, Indonesia, Thailand, Malaysia, and South Korea, non-native investors purchased Asian bonds worth a net $311 million last month, marking the first monthly net purchase since May. The Fed reduced interest rates for the first time since December, citing increasing risks to the labor market and signaling further rate reductions as unemployment rises, work hours shrink, and other signs of economic weakness emerge. Khoon Goh, head of Asia research at ANZ, anticipates a cumulative rate cut of 125 basis points, bringing the Fed funds rate to 3.25% by March 2026. Goh also noted that a more accommodative U.S. monetary policy stance should bolster currencies and asset markets in Asia, excluding China. Last month, investors bought Indian bonds worth $773 million and Malaysian debt instruments worth $721 million, ending a two-month selling trend in both markets. However, South Korean, Indonesian, and Thai bonds saw foreign outflows of $447 million, $400 million, and $337 million, respectively.

A recent study by Germany’s IW economic institute reveals a significant shift in the United States’ import dependency, with the European Union now surpassing China in both the total value and variety of goods imported. Over the past 15 years, the U.S. reliance on EU imports has grown substantially, with the number of product categories where at least 50% of imports originate from the EU increasing from over 2,600 in 2010 to more than 3,100 in 2023. The total import value of these goods, including chemical products, electrical machinery, and equipment, reached $287 billion last year, nearly 2.5 times higher than in 2010. In contrast, China accounted for 2,925 product categories with a total value of $247 billion in the same period. The study suggests that this growing dependence could provide the EU with strategic leverage in future tariff negotiations. EU Commission President Ursula von der Leyen may have had a stronger position in recent talks, which resulted in a baseline tariff rate of 15% on most EU goods. The report also highlights that many EU products are difficult to replace in the short term, a factor that could be pivotal if trade tensions escalate. As a last resort, the EU could consider export restrictions on goods critical to the U.S. economy. Co-author Samina Sultan emphasized that while trade data alone cannot fully capture the importance of these goods, the study underscores the potential risks for the U.S. if it continues to raise tariffs, effectively ‘shooting itself in the foot.’

On September 18, 2023, the Hong Kong Monetary Authority (HKMA) announced a reduction in its base interest rate by 25 basis points to 4.50%, aligning with the U.S. Federal Reserve’s recent decision. This marks the first rate cut by the HKMA since December 2022, when it last lowered rates by a similar margin. The adjustment, implemented through the overnight discount window, aims to maintain economic stability in Hong Kong, whose currency is pegged to the U.S. dollar within a narrow range of 7.75-7.85 per dollar. Major banks in Hong Kong, including HSBC and Bank of China (Hong Kong), partially followed suit, reducing their prime lending rates to 5.125% effective September 19. HSBC’s Hong Kong CEO, Luanne Lim, emphasized that the decision reflects both the U.S. rate cut and local market conditions, while HKMA Chief Executive Eddie Yue highlighted the potential positive impact on the city’s property market and broader economy. The Federal Reserve’s recent quarter-point rate cut and its indication of further reductions this year have influenced Hong Kong’s monetary policy, though Yue cautioned that the pace and extent of future U.S. rate cuts remain uncertain.

The Bank of Japan (BOJ) could proceed with an interest rate hike in October, even if Sanae Takaichi, a prominent advocate of aggressive monetary easing, wins the Liberal Democratic Party’s (LDP) leadership race and becomes Japan’s next prime minister, according to former BOJ executive Tomoyuki Shimoda. Takaichi, a leading candidate in the October 4 leadership race, has been vocal in her opposition to the BOJ’s rate hikes and has called for increased fiscal spending to stimulate the economy. However, Shimoda, who previously served in the BOJ’s monetary affairs department, believes that Takaichi’s potential victory would have a limited impact on monetary policy. He expressed skepticism about her ability to implement policies that could weaken the yen, which has been a concern for policymakers due to its inflationary effects. A weak yen boosts exports but raises import costs, contributing to inflation that has remained above the BOJ’s 2% target. Shimoda noted that a yen fall below 150 to the dollar could also draw complaints from the U.S. administration, which is pursuing a weak-dollar policy to support U.S. exports. The BOJ is likely to raise rates at its October 29-30 meeting if stock prices remain stable and the upcoming ‘tankan’ business sentiment survey, due on October 1, does not show significant deterioration. Shimoda highlighted that solid corporate profits, wage hikes, and persistent rises in food costs are creating a favorable environment for a rate increase. The BOJ is widely expected to maintain its current interest rate of 0.5% at its upcoming meeting, but a Reuters poll indicates that a majority of economists anticipate another 25-basis-point hike by year-end, with bets centered on October and January. Takaichi is known for her support of an ‘Abenomics’-style mix of fiscal and monetary stimulus, while her main rival, Shinjiro Koizumi, has less clear views on BOJ policy. The BOJ exited its decade-long ultra-loose monetary policy last year and raised short-term rates to 0.5% in January, signaling its readiness to continue hiking rates as inflation remains above 2%. The yen’s movements have historically influenced BOJ decisions, and its recent stabilization around 146 per dollar follows a plunge to near two-decade lows last year.