TOKYO – Bank of Japan policymakers are increasingly emphasizing the need to abandon the massive monetary stimulus of the past decade, even as growing global risks heighten concerns about a fragile economic recovery.
A series of hawkish comments from BoJ presidents in recent weeks suggest the bank is preparing markets for a possible policy shift amid growing price pressures in deflation-prone Japan, analysts say.
Even dovish BOJ board members have expressed willingness to discuss a long-awaited exit from former governor Haruhiko Kuroda’s extremely accommodative policies, recognizing that changes in conditions could warrant changing the settings monetary.
READ: BoJ policymaker calls for maintaining ultra-loose policy, sets high bar for exit
Governor Kazuo Ueda said in a newspaper interview on Saturday that the BOJ could obtain enough data by the end of the year to judge whether conditions were right to raise short-term interest rates.
Ueda’s remarks, which sent the yen and bond yields higher on Monday, followed remarks last month by BoJ board member Naoki Tamura, who suggested the bank could raise rates to short term safely without harming the economy.
READ: Yen Explodes Following Ueda’s Remarks; Dollar collapses ahead of US inflation
“Even if the BOJ ended negative rates, it would not reduce its monetary easing as long as it managed to keep interest rates low,” said Tamura, a former commercial bank executive.
The tone of the comment contrasts with the pro-growth stance adopted under Kuroda, who favored aggressive monetary easing to shake Japan out of its deflationary mentality.
It also suggests that the BOJ under Ueda will be more likely to prioritize dismantling the Kuroda-era policy framework, which has been accused of distorting bond markets and crushing banks’ margins.
READ: New BoJ chief will slowly end Kuroda’s political experiment
“The BOJ will proclaim that Japan has reached an inflation rate of 2% and end negative rates in April,” said Mari Iwashita, chief market economist at Daiwa Securities and a veteran BoJ watcher.
To be sure, the BoJ is in no rush to phase out its stimulus measures until there is sufficient data to suggest that the economy can withstand the impact of weakening global demand and allow companies to continue to raise wages, say three sources close to his thinking.
But growing signs of change in Japan’s deflation-prone economy are making policymakers more open to discussing obstacles to an exit, a sign they see decision time approaching.
Inflation has exceeded the 2% target set by the BoJ for more than a year, with businesses passing on rising costs to households. Companies also proposed the largest pay increases in three decades.
Even the doves of the nine board members have noticed these changes.
“I believe that the Japanese economy is finally seeing the first signs of reaching the 2% inflation target set by the BoJ,” said Hajime Takata, one of those board members.
“We must patiently maintain the current massive monetary stimulus measures. At the same time, we must respond with agility to uncertainties as we see the first signs of a positive cycle emerging” between wages and inflation, he said.
Another board member, Junko Nakagawa, outlined conditions for ending negative rates, including continued improvement in household confidence.
“When we see many people sharing the prospect of continued wage growth, we may be able to move away from (negative rates).”
No predefined timing
Since taking the helm in April, Ueda has steadily moved toward phasing out stimulus measures. The BoJ changed policy in July to allow long-term rates to rise further, reflecting higher inflation.
The next step would be to abandon or raise the 0% target for the 10-year bond yield and raise short-term rates by -0.1%.
Recent remarks from policymakers suggest the BoJ may act sooner than markets expect. The majority of analysts polled by Reuters in August believe that the BoJ will only reduce its stimulus measures in a year. Less than half expect negative rates to end in 2024.
There appears to be no consensus within the BoJ board, however, on when or how the bank would dismantle Kuroda’s complex policy framework.
Ueda said the BoJ could end negative rates if it believed inflation would remain sustainably above target.
His deputy Shinichi Uchida appeared to raise the bar for ending negative rates, saying last month that there was “still a long way to go” before the conditions were met.
Salary prospects for next year remain crucial.
Japanese companies traditionally launch their spring wage negotiations with unions in March. But the BOJ could get information ahead of those talks through its regional offices and feedback from business executives on the wage outlook, the sources said.
The global outlook would also be crucial, with a slowdown in the U.S. and Chinese economies hurting manufacturers and discouraging wage increases, the sources said.
“There is so much uncertainty about the outlook for wages and the Japanese economy,” one of the sources said. “The BoJ probably does not have a predefined timetable in mind for when it can take the next step.”
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