Policymakers at the Bank of Japan are increasingly emphasizing the need to exit the decade’s huge monetary stimulus, even as rising global uncertainties raise fears about a shaky economic recovery.
A string of hawkish comments by BOJ speakers in recent weeks suggests the bank is prepping markets for a policy shift amid rising pricing pressures in Japan’s deflationary environment.
Even dovish members of the BOJ board have signaled willingness to discuss a long-awaited exit from former governor Haruhiko Kuroda’s very accommodating policy, noting that changes in conditions may require a change in monetary settings.
Governor Kazuo Ueda said in a newspaper interview on Saturday that the BOJ could have enough evidence by the end of the year to determine if the conditions are in place to raise short-term interest rates.
Ueda’s comments, which sent the yen and bond yields higher on Monday, echoed those of BOJ board member Naoki Tamura, who said last month that the bank could comfortably raise short-term rates without harming the economy.
“Even if the BOJ ends negative rates, it will not reduce monetary easing as long as interest rates remain low,” Tamura, a former commercial bank executive, said.
The tone of the comments contrasts with Kuroda’s pro-growth stance, which advocates dramatic monetary easing to shock Japan out of its deflationary mindset.
It also signals that the BOJ under Ueda will prioritize undoing the Kuroda-era policy framework, which has been criticised for distorting bond markets and hurting bank margins.
“The BOJ will proclaim that Japan has achieved 2% inflation and will end negative rates in April,” said Mari Iwashita, chief market economist at Daiwa Securities and a long-time BOJ observer.
To be sure, the BOJ is not eager to exit stimulus until there is sufficient evidence that the economy can resist the impact of falling global demand and allow firms to continue raising salaries, according to three sources familiar with its thinking.
However, rising indicators of change in Japan’s deflation-prone economy are causing policymakers to be more receptive to debating the barriers to leave, indicating that decision-time is nearing.
For more than a year, inflation has exceeded the Bank of Japan’s 2% objective as businesses pass on greater expenses to consumers. Companies also provided the largest wage raises in three decades.
Even the nine-member board’s doves have seen these changes.
“I believe Japan’s economy is finally showing early signs of meeting the BOJ’s 2% inflation target,” remarked one such board member, Hajime Takata.
“We must maintain the current massive monetary stimulus with patience.” At the same time, he said, “we need to respond quickly to uncertainties because we’re seeing early signs of a positive cycle emerging” between salaries and inflation.
Junko Nakagawa, another board member, outlined the conditions for terminating negative rates, including ongoing improvement in household confidence.
No Pre-set Timing
Since taking over in April, Ueda has been steadily reducing stimulus. In July, the BOJ changed policy to allow long-term interest rates to rise further in response to higher inflation.
The next step would be to abandon or raise the 0% objective for 10-year bond yields, and to raise short-term rates from -0.1%.
Recent comments by policymakers suggest that the BOJ may intervene sooner than markets anticipate. The majority of analysts polled by Reuters in August expected the BOJ to reduce stimulus only after a year. Less than half believe negative interest rates will cease in 2024.
However, there appears to be no agreement among the BOJ board members on when or how the bank will deconstruct Kuroda’s complex policy framework.
Ueda stated that the BOJ could eliminate negative rates if it believed inflation would remain above the goal for an extended period of time.
His deputy, Shinichi Uchida, appeared to raise the bar for the end of negative interest rates, saying last month that there was “still a long way to go” until conditions were met.
The pay forecast for next year remains critical.
In March, Japanese companies generally begin their spring “shunto” salary discussions with unions. However, the BOJ might obtain information prior to those meetings through its regional branch offices and comments from company leaders on the wage outlook, according to the sources.
The global picture would be important as well, with a slowdown in the US and Chinese economies harming manufacturing and deterring wage increases.
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