On Thursday, the two investment banks, JP Morgan and BNP Paribas, expected that the European Central Bank would raise interest rates by an additional 25 basis points during the next December meeting. This is in light of the continuing inflationary pressures and the rise in energy prices, which strengthens the justification for continuing the monetary tightening approach.
The two banks had previously expected the European Central Bank's monetary tightening cycle to end without raising interest rates in December, according to Reuters.
The revised forecasts indicate that borrowing costs in the euro area will remain high for a longer period than previously expected, in light of strong economic growth in the region and continuing concerns about energy supplies.
“We believe that the persistence of the energy shock and the resilience of the economy increase the likelihood of secondary effects,” analysts at BNP Paribas said in a note.
The markets have almost fully absorbed the possibility of the European Central Bank raising interest rates by 25 basis points at its meeting scheduled for September 10, as data compiled by the London Stock Exchange Group indicates a probability of 99.2 percent.
Oil prices fell, but remained above $95 per barrel. Meanwhile, euro zone bond yields fell from multi-year highs, following recent pressure on markets from the escalation of the conflict in Iran, which led to higher energy prices and raised concerns about persistent inflation and monetary policy tightening.
JPMorgan said that “the interaction between continued energy price pressures, strong growth, stable core inflation, and the neutral interest rate, which the European Central Bank expects to rise gradually,” will be among the driving factors for an additional interest rate hike in December.
BNP Paribas expects the European Central Bank to raise interest rates by 25 basis points at its meeting next week, while keeping the door wide open for further increases if signs of secondary effects emerge.
Japanese economic policy is entering a delicate phase in which three challenges intersect. It is the inflation of government spending requests to levels approaching the pandemic era, the continued pressure on the yen, and the decline in household spending at the fastest pace in two and a half years. While Prime Minister Sanae Takaichi's government is betting on investment to stimulate growth, markets are watching its ability to control debt and prevent a weak currency from fueling inflation, without weakening fragile consumption.
Government agencies’ requests for the fiscal year 2027 budget amounted to about 143.1 trillion yen ($917.8 billion), according to the Ministry of Finance, after the government adopted a framework that combines spending in the basic and supplementary budgets. This volume is close to the exceptional levels of spending that Japan witnessed during the “Covid-19” pandemic.
The figure exceeds the 140.61 trillion yen spending package approved during Takaichi's first year in power, which included a supplementary budget of 18.3 trillion yen for fiscal year 2025 and a base budget of 122.3 trillion yen for fiscal year 2026.
The final volume may increase further; The requests include items whose value has not yet been determined, including defense spending at a time when the government is reviewing its defense strategy, which may lead to additional military purchases and investments.
An important part of the increase comes from a new investment program for strategic sectors, whose requests amounted to 12.2 trillion yen, and includes artificial intelligence, semiconductors and economic security. Takaichi is betting that these investments will raise production capacity and growth rates in the long term.
But markets are also looking at the other side of the equation: the cost of financing that spending. The Ministry of Finance raised the assumed interest rate in budget accounts to 3.8 percent, from 3 percent in the 2026 budget, after the ten-year government bond yield touched the 3 percent level for the first time since 1996.
This sent debt service demands, including interest payments and bond redemptions, to a record high of 36.64 trillion yen, up 5.36 trillion yen from the current fiscal year.
Finance Minister Satsuki Katayama confirms that the government will carefully examine applications, and will scrutinize spending and bond issuances in line with the goal of gradually reducing the debt-to-GDP ratio. Takaichi is seeking to keep new bond issuances around 40 trillion yen, in an attempt to reassure a market that fears fiscal expansion will lead to further rise in yields.
Saisuke Sakai, chief economist at Mizuho Research Institute, believes that markets want evidence that greater spending will actually translate into stronger growth, supported by reforms that address structural constraints such as labor, land and energy shortages.
The budget test coincides with the authorities' continued sensitivity towards the yen. Chief currency official Atsushi Mimura confirmed that Tokyo is still on alert for exchange market movements, and that it is in constant contact with the US authorities, in a message that keeps the possibility of intervention alive if the yen returns to falling excessively.
After his statements, the dollar fell to 155.305 yen before it later rose to 156.43 yen, indicating continued fundamental pressure on the currency despite its jump of more than 2 percent in the previous session.
Markets are almost completely priced in. The Bank of Japan raised interest rates this month, after a series of tough signals from its officials, in addition to statements by US Treasury Secretary Scott Besent regarding the weakness of the yen. Katayama confirmed that Besant did not make any demands regarding Japanese monetary policy during their talks, explaining that his belief that the yen is undervalued as a result of the interest rate gap between the two countries represents a position that has been known for some time.
Japan and the United States carried out a rare joint intervention to buy the yen on July 31, indicating concern that the wave of selling of the Japanese currency and bonds would spread to global markets. However, the intervention did not succeed in putting a permanent end to the currency's weakness.
The Bank of Japan's mission is further complicated by weak consumption. Data showed that household spending fell by 3.6 percent on an annual basis in July, compared to expectations of a 1.6 percent decline, recording the eighth consecutive monthly decline and the largest decline since January 2024.
On a seasonally adjusted monthly basis, spending rose only 0.5 percent, versus expectations for a 2.6 percent increase. The data showed that consumers have become more selective, increasing spending on entertainment and household goods, while reducing their spending on food and transportation.
Masato Koike, chief economist at Sompo Institute Plus, believes that the large wage increases achieved during the spring negotiations did not prevent rising prices from putting pressure on consumption, and he expects these pressures to intensify as inflation expands. This becomes more important after core inflation accelerated in Tokyo during August for the third month in a row.
In the midst of these challenges, Takaichi is moving to retain Katayama as Minister of Finance in the government reshuffle expected later this month, in a move that reflects a desire to ensure continuity of fiscal policy and coordination with Washington, especially with the government preparing to advance its main plan to reduce the consumption tax on food.
Katayama played a key role in the talks with Besant, including coordination on joint intervention in the currency market. The two parties also held about ten meetings and talks, including online meetings. What makes her continuation in the position a signal to the markets that Tokyo does not want to change its economic team at a very sensitive stage.
These developments put the Takaichi government before a difficult equation: greater spending to support growth and strategic investment, versus the need to contain debt issuance and higher returns. Monetary tightening to support the yen and curb inflation, while household consumption is already declining.
The success of Japanese economic policy will depend on the government's ability to prove that hundreds of billions of dollars in new spending will generate growth that justifies its cost. With bond yields approaching levels not seen in Japan for three decades, markets are no longer satisfied with promises of growth, but rather are looking for a clear balance between fiscal stimulus, debt sustainability, yen stability, and protecting the purchasing power of families.
Turkey is moving to make the implementation of climate pledges and financing a main focus of its presidency of the United Nations Climate Conference (COP 31), in an attempt to move negotiations from the stage of agreements and pledges to concrete projects and investments, amid global challenges in which energy security, debt, and extreme climate events overlap with the development needs of emerging economies.
The Turkish presidency will move through three main axes, which are, according to what was explained by the Turkish Minister of Environment, Urbanization and Climate Change and Chairman of COP31, Murat Kurum: “Dialogue, consensus and action,” stressing that the success of the Antalya Conference will not be measured only by decisions, but rather by the ability to transform them into executable projects and attract funding to them, leading to results that people can see in their daily lives.
During a press conference on Friday, Corum explained that climate change is no longer a separate environmental issue, but has become linked to energy, industry, cities, trade, water and development, in conjunction with the increasing impact of heat waves, extreme weather phenomena, and food and water security risks.
He added that societies want to see the impact of climate decisions on the ground, and that the world is required to move from “words to implementation,” noting that the Paris Agreement charted an important path for climate action, but the challenge in its second decade is the speed of implementing decisions and pledges.
Corum said that reaching lasting results requires listening to different parties, then finding common ground and turning consensus into workable steps. He added that Türkiye wants “COP 31” to be a turning point based on “transforming words into projects, projects into investments, and investments into results that affect people’s lives.”
He pointed out that Ankara has begun broad consultations with the United Nations system, governments, financial institutions, cities and the private sector, with the aim of identifying obstacles to implementation. The consultations contributed to formulating the “Action Agenda,” which focuses on areas including clean energy, electricity, cities, industry, youth, and food.
Corum placed climate finance at the forefront of the Turkish presidency's files, stressing that the challenge is no longer limited to announcing the amount of funds, but rather ensuring their timely arrival to the countries and projects that need them.
He cited the delay that accompanied the fulfillment of the previous pledge to provide $100 billion annually to developing countries, adding that experience has shown that confidence in the financing system is linked to the actual arrival of the announced funds to the projects.
COP29 in Baku had concluded an agreement to raise the financing target provided to developing countries to no less than $300 billion annually by 2035, while working to increase climate finance flows from public and private sources to $1.3 trillion annually.
Corum said that the world faces a paradox represented by the presence of capital searching for investment opportunities, in exchange for huge needs for climate investment, but the two sides “do not always meet.” He explained that many developing countries have potential and projects, but they need technical and technological support and project preparation to be able to attract financing.
According to Kurum, the Turkish presidency is working on mechanisms to transform climate needs into investable projects, especially in cities, water and infrastructure, and linking them to financial institutions and investors.
Kurum stressed that Turkey aims for strong private sector participation in Antalya, especially companies that possess climate technologies and solutions, but at the same time he stressed the need to put the needs of the least developed countries and small island developing states at the center of the discussions, especially with regard to access to finance.
He said that Türkiye will transfer its local experience to COP 31, pointing to the goal of reaching net zero emissions by 2053, and the policies of the circular economy, waste management, energy efficiency, and expansion of renewable energy.
He also cited the experience of rebuilding areas affected by earthquakes, saying that Türkiye completed and delivered about 455,000 housing units within two years, with a focus on disaster resistance and energy efficiency.
Corum revealed a trend to link the action agenda to measurable goals until 2035, including raising the share of electricity in global energy consumption to 35 percent, reducing resource consumption related to waste by 25 percent, and raising the use of secondary and recycled materials in industry to 15 percent.
He stressed that Turkey wants to make “COP 31” the beginning of a phase in which climate action moves further from negotiations to implementation, with the criterion for success being to transform “words into projects, projects into investments, and investments into results.”
