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Officials in the Bank of Japan have grown increasingly confident that the economy is robust enough to attempt an imminent exit from the world’s remaining negative interest rates.
The central bank has become more bullish on its inflation outlook due to rising momentum for wage increases and growth in service sector prices, strengthening views within the BoJ that the ending of its ultra-loose monetary policy, in place since 2016, could come as early as March.
In a widely expected decision, the BoJ kept overnight interest rates at minus 0.1 per cent at its most recent policy meeting in January. Kazuo Ueda, the bank’s governor, offered few hints on when it might raise interest rates for the first time since 2007.
A subtle but important change, however, appeared in the BoJ’s quarterly economic outlook report released at the same time as the rate decision. In it, the BoJ added a new phrase — the “likelihood” of hitting its 2 per cent inflation target “has continued to gradually rise” — offering its strongest hint yet that policy normalisation was approaching.
A BoJ official said the addition of the phrase was to communicate its intention to financial markets and make clear that there was a stronger outlook on the economy. “We can’t say when, but the economy is steadily moving in the direction towards a policy revision,” the official said.
At last week’s news conference, Ueda also made clear that a cycle of increases was not guaranteed to follow a decision to end negative interest rates, saying: “An extremely accommodative financial environment will continue for the time being.”
The signals from the BoJ came with caveats that it needed to assess further economic data on prices and wages. However central bank officials have also emphasised their more hawkish tone in regular exchanges with financial market participants.
“The fact that the BoJ added the line . . . on the front page of its economic outlook is a clear message that policy change is coming soon,” said UBS economist Masamichi Adachi, who did not rule out a policy change in March although his main scenario was still for this to happen in April.
Morgan Stanley MUFG and BNP Paribas said in published notes that an interest rate increase could come in March.
Since the BoJ’s meeting, the yen has climbed roughly 1 per cent against the US dollar while the yield on the 10-year Japanese government bond has risen to 0.7 per cent from 0.6 per cent before the BoJ decision. A strengthening yen would be consistent with the view that Japan could soon move away from negative rates.
A summary of opinions from the most recent policy meeting also reflected growing confidence among BoJ board members that economic conditions would support an exit from its easing measures.
“It seems that conditions for policy revision, including the termination of the negative interest rate policy, are being met,” said one member, according to the summary released on January 31. Another pointed to the need “to start discussing the exit from the current monetary policy, since the achievement of the target is becoming more realistic”.
One member described the current phase as “a golden opportunity”, warning that upcoming policy shifts by overseas central banks could reduce the BoJ’s flexibility in revising its monetary policy.
Receding inflation around the world has stoked expectations that central banks including the US Federal Reserve and European Central Bank will start to cut rates this year. The timing of the policy change is unclear, with Fed chair Jay Powell signalling on Wednesday that it would not begin cutting interest rates in March.
Despite the BoJ’s more bullish tone on the economy, Stefan Angrick, a senior economist at Moody’s Analytics, said latest data did not necessarily support the central bank’s view, with consumer spending at the level it was in 2021.
“The BoJ is trying to prepare the runway for the next step, but if it waits too long, the data could keep weakening and they could run out of justification for normalising,” he said.