Bank of Japan Governor Kazuo Ueda and his board have one more day to decide if it’s time for the nation’s first interest rate hike in 17 years, as speculation builds that it will proceed.
Some 90% of BOJ watchers sees the risk of authorities ending the negative rate on Tuesday at the meeting’s conclusion, with that likelihood bolstered after the nation’s largest union group announced first-round results to annual wage negotiations that far exceeded expectations.
It’s a monumental moment for Japan. The board is weighing whether to end an era that saw the most aggressive monetary easing in modern history. In addition to a potential departure from the -0.1% negative rate, the fate of a slew of extraordinary tools including yield curve control and massive asset purchases is hanging in the balance.
The policy experiment’s near-term demise is a near certainty. Whether the move comes in March or April is the question.
Markets are primed to turn on the answer, with a rate-hike Tuesday potentially providing near-term support to the yen. Strength in the currency would be liable to weigh on stocks, which have benefited from the cheap yen.
Opinions among traders and economists have vacillated in recent days in parallel to swings in volatile swap rates that reflect expectations for policy change.
There was no unanimous view even inside the bank as recently as early last week, according to people familiar with the matter. That was before the federation of unions, Rengo, announced on Friday that its members had secured wage increases of 5.28% on average, far above the 4.1% predicted by economists surveyed by Bloomberg, and marking the biggest gains in more than 30 years.
“Chances have risen for the BOJ to choose March,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Research Institute. “Waiting until April would be meaningless if the market is going to price in the move at 100% if they don’t act this time.”
A delay may trigger a sharp weakening in the yen in the short-term, possibly even back past 150 to the dollar and into an area of concern for the government.
The wage hikes were seen as the final data set for the board to consider as part of its deliberations, people familiar with the matter told Bloomberg ahead of that news.
Japan’s benchmark 10-year sovereign bond yield edged higher late Friday after the wage results. Some investors see the 10-year yield rising above 1.25% by year’s end as the BOJ changes direction.
Worker pay gains play a critical role as the BOJ pursues a goal of achieving 2% sustainable inflation. Increases that outpace inflation could be the catalyst that sets in motion a virtuous cycle in which wage growth feeds into demand-led price gains.
Even with the pay momentum, Ueda has the option of waiting another month. Unlike his global peers, the BOJ governor faces little risk of the sort of runaway inflation that prompted aggressive tightening in the US and Europe. Data due Friday are expected to show consumer price growth accelerated in February, but the pace is forecast to stay under 3%, with much of the gain largely due to base effects.
Those touting April as the likely timing maintain there’s no rush. The bank will get a large volume of data just ahead of the April 25-26 gathering, making that meeting an opportune time to move, former BOJ Chief Economist Kazuo Momma said.
There could be mixed views on the board. If Ueda pushes for a landmark decision to lift off tomorrow, he may not get a unanimous consensus. So far he’s refrained from dropping clear hints on his preferred timing, merely repeating his pledge to take appropriate steps after a comprehensive review of the economy.
Since taking the helm in April last year, Ueda has proven to be a nimble operator. Within about six months, he eliminated the biggest headache of the current policy framework by adding flexibility to the yield curve control mechanism on two occasions. That pre-empted the sort of massive bond selloff seen in Australia when the Reserve Bank of Australia made adjustments in 2021.
At the same time, Ueda is known for having voted against ending zero interest rates back in 2000, when he was one of nine board members. That exit step, which the bank conducted in the face of government opposition, was slammed as premature. It amplified doubts over the BOJ’s commitment to supporting the economy until Ueda’s predecessor Haruhiko Kuroda launched a massive easing program in 2013.
Times have changed. Ueda faces no such opposition this time. Japan’s key inflation gauge has stayed at or above BOJ’s 2% inflation target for 22 months, generating ire among consumers frustrated over falling real wages, and helping to sink support ratings for Prime Minister Fumio Kishida.
“It’s all up to Ueda,” said Masaaki Kanno, former BOJ official and chief economist at Sony Financial Group. “After navigating the BOJ this far to be able to end the negative rate whenever it wants, there is no big difference for the overall economy whether it’s in March or April.”
Whenever the negative rate goes away, one thing is abundantly clear: Policy settings will remain accommodative. Ueda and his fellow board members have reiterated this point a number of times in an effort to prepare the market for what’s coming.
On the other hand, what exactly the new setting might be is open to question. Some 67% of surveyed economists predict the new policy rate setting will be between 0% and 0.1%. Another 16% predict it will be around 0%, while 10% think it will be set at about 0.1%.
They forecast the terminal rate is 0.5%, and about half forecast the pace of hikes to be once or twice a year, whereas the other 51% say it’s hard to tell, according to a Bloomberg survey.
“The BOJ will explain it’s still accommodative even after adjusting its large-scale easing,” said Mari Iwashita, chief market economist at Daiwa Securities. “Even if they can raise rates again, that will probably be in autumn at the earliest.”
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