Daily Management Review

Japan Is About To Eliminate Negative Interest Rates, And The Likelihood Of A BOJ Withdrawal In March Is Growing


Japan Is About To Eliminate Negative Interest Rates, And The Likelihood Of A BOJ Withdrawal In March Is Growing
Larger-than-expected wage increases by well-known Japanese companies have greatly increased the likelihood that the central bank will abandon its massive stimulus programme and end its eight years of negative interest rate policy next week.
According to those acquainted with the bank's thinking, internal exit preparations had been underway since Kazuo Ueda became the BOJ governor in April of last year and were mostly completed by year's end.
Ueda and other BOJ officials have recently emphasised that the timing of a move away from negative rates will depend on how this year's annual pay discussions between companies and employees turn out.
The largest union group in the nation announced on Friday that annual labour talks with major corporations resulted in pay hikes of 5.28%, the highest in 33 years and significantly beyond private projections for an increase of about 4.5%.
According to observers, the outcomes solidified the likelihood of a departure from negative rates during the BOJ's two-day meeting that concludes on Tuesday. They also raised expectations that increased wages would spur stagnant household spending.
"Given the stronger-than-expected wage talk outcome, the BOJ will likely ditch negative rates and yield curve control next week," said veteran BOJ watcher Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.
"The BOJ could have waited until April if the wage talk outcome wasn't this strong. But with markets already pricing in the chance of an exit, it would actually be a surprise if the bank forgoes ditching negative rates next week," she said.
The BOJ will set the overnight call rate as its new target and guide it in a range of 0-0.1% by paying 0.1% interest on excess reserves financial institutions park with the central bank if the nine-member board determines that the conditions are favourable.
The radical monetary experiment that former Governor Haruhiko Kuroda has been implementing since 2013 will come to an official end when the BOJ abandons its negative rate policy, sources have told Reuters. It will also give up its control over bond yields and stop buying riskier assets like exchange-traded funds (ETF).
According to a March poll, 35% of economists said the BOJ will abolish negative rates at its two-day meeting on Tuesday. This is an increase from the 7% who predicted it the previous month, but it is still less than the 62% who predicted it would happen at the meeting that followed on April 25–26.
The market is focusing on any hints the BOJ may provide regarding the rate of any interest rate hikes that may come following the end of negative rates, which is seen as almost certain.
Given the uncertainty surrounding the economic outlook, Ueda has stated that the central bank will maintain accommodative monetary conditions even after terminating negative rates and will not initiate any "discontinuity" from the current ultra-loose policy.
According to individuals who spoke with the media, the BOJ will probably follow through on any direction it provides for the future course of policy after eliminating negative rates.
The BOJ implemented a massive asset-buying programme in 2013 under former Governor Kuroda with the goal of reflating growth and accelerating inflation to its objective of 2% in around two years.
In 2016, the central bank changed its stimulus programme to one that was more sustainable due to lacklustre inflation. As a result, it implemented negative rates and yield curve control (YCC).
But last year, the BOJ adjusted YCC to loosen its hold on long-term rates as the significant declines in the value of the yen increased the cost of imports and intensified public criticism of the country's extremely low interest rates.
Japan's first interest rate increase since 2007 would occur if short-term rates were to stop being negative.