"Bank of Japan Likely to End Negative Interest Rates in April Next Year"

Inflation Forecast Revised Upward with Expected Interest Rate Hike
October Consumer Prices at 3.3%... Inflation Target Set at 2%
Monitoring Wages and Prices with Deflation Escape in Mind

[Image source=Yonhap News]

The Bank of Japan (BOJ) is likely to lift its negative interest rate policy as it raises its inflation forecast for April next year, according to an analysis.

On the 22nd, Kyu-yeon Jeon, a researcher at Hana Securities, stated, "The BOJ expects the Japanese economy to show a moderate recovery next year due to the visible pent-up demand, and if the forecast path holds, inflation is likely to rise gradually."

Researcher Jeon explained, "The BOJ believes that the risk of changing policy too early is greater than the risk of changing it too late," adding, "They think now is the opportunity to completely escape deflation." In other words, it is highly likely that the BOJ will seek an exit strategy while confirming the wage negotiations during the spring labor offensive in March next year and the inflation transmission process.

Japan's consumer price index in October rose 3.3% year-on-year, exceeding the BOJ's inflation target of 2%. Since July last year, Japan has consistently maintained an inflation rate above 3%. Currently, the BOJ underestimates inflation, attributing the rise to price pass-through effects from increased import prices. At the same time, it emphasizes that for an exit strategy, a virtuous cycle between wages and prices must be strengthened and sustained inflation must develop.

Japan's wage growth rate recorded 3.6% in this year's spring labor offensive negotiations, the highest since 1994. The National Trade Union Confederation has set a wage increase target of over 5% for next year. The Japanese government is also encouraging salary increases. As part of this, it has decided to raise the corporate tax credit rate for large companies that increase total wages by more than 5%. Meanwhile, former BOJ Governor Hiroki Kuroda mentioned that a basic wage increase of about 3% is appropriate to achieve the 2% inflation target.

Researcher Jeon analyzed, "If wage increases similar to this year materialize next year, household income conditions will improve, companies will pass labor costs onto product prices, creating a virtuous cycle of inflation, and conditions will be established to induce normalization of monetary policy."

He added, "Since Japan announces quarterly economic outlooks in January, April, July, and October, it is highly likely that the BOJ will revise upward its inflation forecast at the monetary policy meeting in April next year."

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