The Bank of Japan headquarters, in Tokyo, on Sept. 20, 2023.ISSEI KATO/Reuters
A growing number of Bank of Japan policy makers are warming to the idea of ending negative interest rates this month on expectations of hefty pay hikes in this year’s annual wage negotiations, four sources familiar with its thinking said.
Upon ending negative rates, the central bank is also likely to overhaul its massive stimulus program that consists of a bond yield control and purchases of riskier assets, they said.
But an imminent shift is a close call as there is no consensus within the nine-member board on whether to pull the trigger at its coming March 18-19 meeting, or hold off at least until the subsequent meeting on April 25-26, they say.
Many BoJ policy makers are closely watching the outcome of big firms’ annual wage negotiations with unions on March 13, and the first survey results to be released by labour umbrella Rengo on March 15, to determine how soon to phase out their massive stimulus.
Significant pay hikes will likely heighten the chance of action in March, as the offers by big firms usually set the tone for those by smaller firms nationwide, the sources said on condition of anonymity owing to the sensitivity of the matter.
The BoJ hopes that solid wage increases will coax consumers to spend more, boosting demand and prices after years of economic stagnation and deflation.
“If the spring wage negotiation outcome is strong, the BoJ may not necessarily need to wait until April,” one of the sources said, a view echoed by another source.
But the BoJ may hold off until April if many board members prefer to wait for next month’s “tankan” business sentiment survey and the bank’s regional branch managers’ report on the nationwide wage outlook, before making a final decision, they said.
The yen has been rising against the dollar on growing speculation that the BoJ could end negative rates soon, and bets of imminent rate cuts by the U.S. Federal Reserve. It rose to 146.95 to the U.S. dollar on Friday, its highest level since early February.
The BoJ has long targeted inflation at 2 per cent, and has guided short-term rates at -0.1 per cent and the 10-year bond yield around zero per cent under a policy dubbed yield curve control (YCC).
With inflation exceeding the target for well over a year and prospects for sustained wage gains heightening, many market players expect the central bank to end its negative interest-rate policy this month or in April.
Upon pulling short-term rates out of negative territory, the central bank is likely to ditch its 10-year bond yield target, the sources said.
To avoid an abrupt spike in long-term rates, the BoJ will likely commit to intervening in the market when needed to stem sharp rises, or offer guidance on the amount of government bonds it will keep buying, they said.
Japan’s Jiji news agency reported on Friday the BoJ is considering replacing YCC with a new quantitative framework that will show in advance how much bonds it will buy in the future.
Prospects of continued solid wage growth, driven by rising living costs and an intensifying labour shortage, have heightened momentum for an end to negative rates in March.
Japan’s largest trade union group Rengo said on Thursday average wage-hike demands hit 5.85 per cent for this year, topping 5 per cent for the first time in 30 years.
BOJ board member Naoki Tamura, a former commercial bank executive, has been the most vocal advocate of an early exit from negative rates, signalling in August last year that the bank could take such action by March, 2024.
Fellow board member Hajime Takata also called for an overhaul of the BoJ’s stimulus program last week, saying that Japan was finally seeing prospects for durably achieving the bank’s inflation target.
If a majority of the nine-member board vote in favour of ending negative rates, it would pave the way for Japan’s first rate hike since 2007.
But there is uncertainty on whether any proposal to end negative rates in March would gain enough votes, as some board members may feel cautious about exiting amid recent weak signs in consumption and the broader economy.
Preliminary data suggested Japan’s economy slipped into recession in the fourth quarter owing to weak domestic demand, though more recent readings pointed to stronger capital expenditure that will likely lead to an upgrade when revised gross domestic product figures are published on March 11.
Household spending also dropped 2.5 per cent in December from a year earlier, extending its decline for a 10th month, owing to supply disruptions of cars and continued declines in real wages.
Board member Seiji Adachi has said it might take until after the April, 2024, start of the next fiscal year to determine whether conditions are conducive to ending negative rates.
Two other members, Toyoaki Nakamura and Asahi Noguchi, have also voiced caution over a premature withdrawal of monetary support.
Sources have told Reuters earlier that the BoJ will downgrade its assessment on consumption and output, nodding to recent weak signs in the economy.