Japan’s decision to jettison negative interest rates is rich in symbolism. Deflation, which dogged the economy for a generation, has been dispatched. Workers are finally enjoying meaningful wage increases. Policymakers are no longer required to be defensive when they explain their country’s outlook. After a few false dawns, the nation has climbed out the hole it fell into after the property industry collapsed three decades ago. You might even think this marks the end of a certain exceptionalism.
The substance of the steps — Japan also did away with formally controlling long-term bond yields — warrants less champagne. The increase in the main rate is minuscule by the global standards of central banking: from minus 0.1%, where it has stood since 2016, to around zero. By the time the Bank of Japan got around to abolishing it on Tuesday, the sub-zero rate applied to a minute slice of real-life lending. Caveats abounded.
This is not the start of a hiking cycle along the lines of that undertaken by the Federal Reserve, the Bank of England, the Bank of Korea and the reserve banks of Australia and New Zealand, though some comments by Governor Kazuo Ueda and lieutenants will be portrayed as hawkish. They will likely flinch at such a description, with justification. The BOJ has avoided giving much indication that hikes, plural, are on the agenda in coming months. Indeed, the central bank confirmed this stance in a follow-up statement, pledging that “accommodative financial conditions will be maintained for the time being” given the outlook for the economy and prices. Just to get this shift bedded down without the controversy that beset tightening in 2000 and 2007 will be victory enough.
Ueda, who has helmed the monetary authority for almost a year, voted against the millennium increase as a junior member of the BOJ panel. He had returned to academia by the time of the next hike seven years later, which was engineered on the eve of the global financial crisis. Timing has not been a forte of the bank. One feature of Tuesday’s move has been the absence of opposition from politicians, making the job easier. But that relative calm would be shattered if a series of hikes followed soon after: Japan has the highest debt burden of any rich country and must provide for an aging population while preparing for a big lift in defense spending.
The removal of yield-curve control, in which the bank restrained the interest rates 10-year government debt, has been a long time coming. YCC has been steadily watered down since 2022. Even with last rites pronounced, the bank isn’t surrendering the ability to steer the debt market. Bond purchases will continue without a nominal target. Watch any intervention to gauge the de-facto goal. Totems of unorthodox stimulus may be ending, but policy will remain far more accommodative than almost anywhere else.
Almost a year into his leadership, Ueda has dismantled the paraphernalia erected by Haruhiko Kuroda during his decade in office. It was Kuroda who, in a relentless campaign to reflate the economy, took borrowing costs into the red in 2016. From the beginning, the BOJ was concerned about the impact of negative rates on banks’ profits. Through a three-tier system, it only ever applied the -0.1% rate to a sliver of deposits at the central bank — watering down the policy before it even began in order to “prevent an excessive decrease in financial institutions’ earnings.” While important, this qualifier wasn’t good enough. Banks were livid.
Kuroda’s massive easing, which had started in 2013 with so much positivity because people desperately wanted to see bold moves, began to falter. The trauma of negative rates, days after he appeared to deny such a move was planned, marred the rest of his tenure. As the yield curve flattened, and the BOJ’s policies seemed to erode — rather than boost — confidence, YCC was introduced. The former governor threatened multiple times to cut the rate further into negative territory, but never went through with it. With the introduction of negative rates squeaking through in a 5-4 vote, that was probably wise.
The Kuroda scaffolding has gone. If Ueda had drawn up a priority list for his first year in the C-suite, extracting the BOJ from his predecessor’s shadow would rank near the top. In that sense, it’s a job well done. The effectiveness of negative rates will continue to be debated for years, but in Japan they have long since outlived whatever usefulness they might have had. Intended to nudge banks into providing more lending, the policy instead seemed to encourage them to invest in riskier assets, like the US real estate bet that has burned one major lender. Inflation is around the bank’s target, and the wage gains secured by major unions exceeded even the most optimistic projections. Sticker shock at the checkout is fading from the headlines as firms reduce the pace at which they raise prices. The near-term headlines will look good for Ueda.
But talk of a hiking cycle or a “liftoff” are wide of the mark. For all the chatter this week of “normalization,” a zero-interest rate policy was considered completely out of the realm of the usual when the BOJ first introduced it in the 1990s. In the decades that followed, it became mainstream. Japan is often depicted as an outlier, but its experience can in some ways be considered prelude.
There’s no compelling argument for significantly tighter policy. The economy avoided a technical recession in the fourth quarter, but only barely. Neither households nor the government can sustain significantly heavier borrowing costs. And to what end? Inflation has come down from its highs last year without the BOJ doing anything.
Ueda is choosing to move at a relatively benign time in the global economy. He may want to push rates just a little bit higher, so he has room to cut when the next slowdown arrives — without returning soon to negative territory. Anything beyond that seems fanciful.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Views are personal and do not represent the stand of this publication.
Credit: Bloomberg
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