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Bank of Japan’s Dovish Bent Reinforces Asia’s Policy Divergence

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  • Bank of Japan’s Dovish Bent Reinforces Asia’s Policy Divergence

The Bank of Japan’s determination to press on with its unprecedented monetary stimulus leaves it out of step with developed world peers, which are either raising rates or debating how to start normalizing policy.

Yet in its own region — Asia — the BOJ is far from alone. While the People’s Bank of China is turning to open market-operations and lending tools to curb excessive leverage in parts of the financial system, it’s holding benchmark rates at all time lows to keep growth humming. Slowing inflation in India has put the prospect of more easing back on the table, and the regions’ smaller central banks are also signaling no rush to raise borrowing costs.

HSBC Holdings Plc sees no tightening in Asia through to the end of 2018. That’s in contrast to the U.S., where interest rates are already on the way up (though how quickly remains an open question) and Canada, where the central bank last week raised rates for the first time in seven years. And while monetary accommodation remains in place for now in Europe, the debate on how to rein in stimulus is underway.

“This is a major decoupling of Asian central banks from the Fed,” said Robert Subbaraman, chief economist for Asia ex-Japan at Nomura Holdings Inc. in Singapore.

In Japan, the world’s petri dish for central bank experiments, the BOJ Thursday kept its monetary stimulus program unchanged even as it pushed back the projected timing for reaching 2 percent inflation for a sixth time.

The BOJ now expects to hit its price goal around the fiscal year starting April 2019, versus a previous projection of around fiscal 2018. It also cut its inflation estimates for the current and next fiscal years.

“Risk to both economic activity and prices are skewed to the downside,” the BOJ said in its outlook.

That leaves the prospect of a steep reduction of its balance sheet or a shift to steering the economy through conventional monetary policy appearing as remote as ever.

Not only is the BOJ nowhere close to exiting its massive stimulus program, it may yet need to unleash even more if it is to ward off deflation, said Shane Oliver, chief economist at AMP Ltd. in Sydney. “The BOJ may yet be forced to experiment with even newer tools,” he said.

Unlike the Fed’s Janet Yellen, Kuroda hasn’t signaled any plans to shrink the 500 trillion yen ($4.5 trillion) balance sheet, which is almost the entire size of the nation’s economy, the world’s third-largest, and the highest ratio against GDP among major nations.

It’s a similar status quo across the region.

Australia’s central bank has kept interest rates at a record-low 1.5 percent since August as it tries to smooth the economy’s transition away from mining investment-led growth. Underscoring the Reserve Bank of Australia’s policy pickle, the mere mention of a theoretical nominal neutral interest rate of 3.5 percent in minutes of last month’s meeting released Tuesday was enough to send the Australian dollar to a two year high — a development the RBA has long warned risks undermining the economy’s transition.

“They are in a bind where they have one eye on the labor market, one eye on growth rates, one eye on property and one eye on the Australian dollar,” said Richard Holden, a professor of economics at the UNSW Business School in Sydney. “If you are trying to target four things with one policy tool, that is essentially impossible to do.”

India’s central bank is also in a quandary. Tipped by some analysts to lower interest rates again, it’s also being forced to suck liquidity out of the banking system after a government decision last year to cancel almost 86 percent of currency in circulation resulted in a flood of money into the nation’s banks, which is still being mopped up.

“It’s like a doctor giving medicines to control diabetes and then recommending that the patient be given lots of glucose,” said Rupa Rege Nitsure, chief economist at L&T Finance Holdings Ltd.

The risk of an inflation outbreak in Asia can’t be fully ruled out given its vulnerability to swings in food and energy prices and investment flows.

“Inflation will surely return,” Shang-Jin Wei of Columbia University and previously Chief Economist of the Asian Development Bank.

But one reason Asia isn’t scrambling to normalize is that monetary policy in many economies never became quite as abnormal in the first place (Japan being the region’s outlier). Asia’s buffers are in good shape too, with most economies boasting plentiful reserves, solid external positions and favorable investment flows, meaning there’s no imperative to keep policy in step with the U.S. for now.

The world’s fastest growing region appears to have the lowest odds of rate increases and that outlook is unlikely to change soon, said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong.

“Policy rates will remain nailed to the floor for a long while,” he said.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Energy

Nigeria’s Power Sector to Get $7.5bn from $30bn African Electrification Initiative, Says Minister Adelabu

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Minister of Power Adebayo Adelabu has said that Nigeria is set to receive a portion of a $30 billion investment aimed at electrifying Africa.

During a visit to Splendor Electric Nigeria Limited, Adelabu revealed that the World Bank and the African Development Bank (AfDB) have committed to this ambitious initiative with Nigeria slated to receive approximately $7.5 billion, or 25% of the total fund.

The groundbreaking initiative is designed to extend electrification to an additional 300 million Africans over the next five years.

This large-scale project aims to address the energy deficit that has long plagued the continent and is expected to transform the power infrastructure significantly.

Adelabu expressed optimism about Nigeria’s role in the project, citing the country’s large population and ongoing power sector reforms as key factors in securing a substantial share of the funds.

“I want to inform you of the proposal or the intention, which is at an advanced stage, by the World Bank and the African Development Bank to spend about $30 billion to extend electrification to an additional 300 million Africans within the next five years. Nigeria is going to participate fully in this. I am confident that nothing less than 20% or 25% of this fund would come into Nigeria because of our population,” Adelabu stated.

The minister’s visit to Splendor Electric Nigeria Limited, a porcelain insulator company, underscores the government’s commitment to involving local businesses in the electrification drive.

The investment will focus on enhancing and upgrading power infrastructure, which is crucial for improving electricity access and reliability across Nigeria.

Despite the promising news, Nigeria continues to face significant challenges in its power sector. The country’s power grid has suffered frequent collapses, with the Nigerian Bureau of Statistics reporting less than 13 million electricity customers and frequent nationwide blackouts.

The International Energy Agency highlighted that Nigeria’s national grid experienced 46 collapses from 2017 to 2023, exacerbating the nation’s energy crisis.

To combat these issues, the government is also advancing the Presidential Power Initiative, a project in collaboration with Siemens, which aims to build thousands of new lines and numerous transmission and injection substations.

Adelabu noted that the pilot phase of this initiative is nearing completion and that Phase 1 will commence soon.

With over 200 million people and a chronic energy shortfall, Nigeria’s power sector is in urgent need of overhaul.

The additional $7.5 billion from the African Electrification Initiative represents a critical step toward achieving reliable and widespread electricity access.

The investment is expected to stimulate not only infrastructure development but also economic growth, creating opportunities for local companies and improving the quality of life for millions of Nigerians.

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Crude Oil

Oil Prices Climb as Markets Eye Potential US Rate Cuts in September

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Oil prices rose during the Asian trading session today on speculation that the U.S. Federal Reserve may begin cutting interest rates as soon as September.

Brent crude oil, against which Nigerian oil is priced, increased by 32 cents to $82.95 a barrel, while U.S. West Texas Intermediate crude oil climbed 34 cents to $80.47.

The anticipation of rate cuts stems from recent U.S. inflation and labor market data indicating a trend towards disinflation and balanced employment, according to ANZ Research.

The Federal Reserve is set to review its policy on July 30-31, with expectations of holding rates steady but providing clues for potential cuts in September.

The potential rate cuts could stimulate economic activity, increasing demand for oil. This optimism has been partially offset by recent concerns over China’s slower-than-expected economic growth, which could dampen global oil demand.

President Joe Biden’s announcement to not seek re-election and endorse Vice President Kamala Harris had minimal impact on oil markets.

Analysts suggest that U.S. presidential influence on oil production is limited, although a potential Trump presidency could boost oil demand due to his stance against electric vehicles.

In response to economic challenges, China surprised markets by lowering key policy and lending rates. While these measures aim to bolster the economy, analysts remain cautious about their immediate impact on oil demand.

With OPEC+ production cuts continuing to support prices, the focus remains on the U.S. Federal Reserve’s next moves.

Any decision to cut rates could further influence oil prices in the coming months, highlighting the interconnectedness of global economic policies and energy markets.

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Dangote Refinery Clash Threatens Nigeria’s Oil Sector Stability

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Nigeria’s oil and gas sector is facing a new challenge as a dispute between Dangote Industries Limited and the Nigerian Midstream and Downstream Petroleum Regulatory Agency (NMDPRA) intensifies.

The disagreement centers on claims by NMDPRA that diesel from the Dangote Refinery contains high sulfur levels, making it inferior to imported products.

The $20 billion Dangote Refinery, located near Lagos, has the potential to process half of Nigeria’s daily oil output, promising to reduce dependency on foreign fuel imports and create thousands of jobs.

However, the recent accusations have cast a shadow over what should be a significant achievement for Africa’s largest economy.

Industry experts warn that the ongoing conflict could deter future investments in Nigeria’s oil sector.

“Regulatory uncertainty is a major disincentive for investors,” said Luqman Agboola, head of energy at Sofidia Capital. “Any factor affecting foreign investment impacts the entire value chain, risking potential energy deals.”

The regulatory body, led by Farouk Ahmed, maintains that Nigeria cannot rely solely on the Dangote facility to meet its petroleum needs, emphasizing the need for diverse sources.

This position has stirred controversy, with critics accusing the agency of attempting to undermine a vital national asset.

Amidst these tensions, energy analyst Charles Ogbeide described the agency’s comments as reckless, noting that the refinery is still in its commissioning stages and is working to optimize its sulfur output.

In response, Dangote Industries has called for fair assessments of its products, asserting that their diesel meets African standards.

The refinery’s leadership argues that certain factions may have ulterior motives, aiming to stifle progress through misinformation.

As the dispute continues, the broader implications for Nigeria’s oil sector remain uncertain. The outcome will likely influence not only domestic production but also the country’s standing in the global energy market.

Observers hope for a resolution that supports both industrial growth and regulatory integrity, ensuring stability in a sector crucial to Nigeria’s economy.

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