Bank of Japan Governor Kazuo Ueda attends a press conference after a policy meeting at BOJ headquarters in Tokyo on March 19.Kim Kyung-Hoon/Reuters
John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).
It was the kind of news that barely resonates at breakfast tables. Nevertheless, the financial world sat up and took notice. On Tuesday, in the early hours of the morning before Statistics Canada released its latest inflation report, the Bank of Japan officially ended the era of negative interest rates (whereby investors had to literally pay the central bank to hold their money). In so doing, it became the last major central bank to move away from an easy-money policy.
Few Canadians will have taken note of this development, but in time it may affect them in important ways. When the Statscanreport revealed inflation to be softer than expected, the yield (or interest rate) on the Canadian government 10-year bond fell by nearly 10 basis points. In response, the exchange rate of the Canadian dollar to its American counterpart lost a penny. It was only when yields in Canada resumed rising as the day went on that the dollar rose back from its lows.
This is called arbitrage, and it’s the key piece in the puzzle of how the Bank of Japan’s decision could ultimately affect Canadians. Arbitrage happens when investors take out loans in one currency, where interest rates are low, then park their money in another currency, where interest rates are higher. For years, Japanese investors have borrowed money for nothing in Japan, then invested it in U.S. bonds, accumulating a stash that is now worth more than $1-trillion.
This added demand for U.S. bonds drove up their value; and since the price of a bond varies inversely to its yield, for years this helped to suppress the U.S. government’s borrowing costs – which creates the conditions for the central bank to set lower interest rates.
Nearly a third of the U.S.’s debt is owed to foreigners, in the form of U.S. Treasury paper, including the bonds the government regularly issues to fund its deficit. Of the foreign holdings, the largest chunk, roughly 4 per cent of the total, is owned by Japanese investors. On a much smaller scale, Japanese investors have similarly traded yen for Canadian dollars, aggressively snapping up Canadian government bonds after 2016, the year the Bank of Japan instituted negative interest rates.
In the short term, this week’s move by the Bank of Japan was so modest that it hardly registered on currency markets. Although the central bankabandoned negative rates, what it now offers is barely above zero, so investors hardly rushed to cash in their foreign holdings and bring the money back home. But as a signpost of what’s to come, this week may prove to be an important turning point.
Given the very expensive transformation under way in the U.S. economy, funded by government subsidies, U.S. borrowing has surged. This means the supply of bonds will continue rising. If the carry-trade from Japan dampens even a little bit, this could cause demand for U.S. bonds to drop to the point their prices start falling. That, in turn, would keep interest rates from coming down. And if U.S. rates remain high, the scope for deep cuts in Canada will be limited by the arbitrage risk of investors dumping Canadian bonds for U.S. ones.
There won’t be a seismic shift any time soon, though. Not least because of what subsequently happened at Wednesday’s meeting of the Federal Reserve. Canada is one of several countries in which inflation continues to decline towards the 2-per-cent target central banks have set for it. Britain released its own inflation report earlier in the day, and it too pointed to a similar softening. But given the outsized impact of the U.S. economy, and the particular dependence of Canada on it, it’s what happens there that matters most.
And what emerged from the Fed meeting was a steady-as-she-goes message. After Jerome Powell told journalists that the Fed was still on track to start cutting rates as early as the summer, and still expected three rate cuts this year, markets resumed rallying, setting new records by day’s end.
Still, the enthusiasts, including property investors in Canada expecting another spring rally like last year’s, may be getting a bit ahead of themselves. Although the Fed is erring on the side of bullishness, the ‘dot-plot’ it released showed that more governors are growing cautious about the current course of inflation. While they still expect rates to come down, they don’t necessarily expect them to come down by much. Future interest rates will likely settle at a higher level than past ones.
That’s because the conditions that kept them low for so long are going into reverse. Put it altogether and despite initial reactions, this week’s events probably hammered yet more nails in the coffin of the cheap-money era, one that has shaped our expectations for decades – including, in Canada, our expectation that house prices will only ever rise.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
