If Early, Japan Raises Interest Rates Next Week... Market Focuses on 'Pace of Tightening'

Japan's Policy Rate Hike Confirmed for March-April
Market Focuses on Tightening Pace
Emphasis on Gradual Rate Increases
Wage Negotiations This Year a Key Puzzle

The Bank of Japan (BOJ) is expected to end its negative interest rate policy as early as next week and make a pivot. The market is closely watching how much time interval BOJ will take between interest rate hikes. A gradual rate increase, different from major countries like the U.S. and Europe, is considered likely.

[Image source=Yonhap News]

According to major foreign media such as Bloomberg on the 11th (local time), BOJ is expected to raise short-term policy rates at the monetary policy meeting scheduled for April 18-19. Even if short-term rates remain unchanged at that time, a rate hike in April is widely anticipated. BOJ has maintained the short-term rate at -0.1% since 2016 to escape deflation (falling prices amid economic stagnation).

The market is paying attention to whether BOJ will raise the short-term rate to zero or immediately turn it positive (+). There is also interest in how much BOJ will raise rates this year starting with the first hike. However, Takahumi Yamawaki, head of Japan rate research at JP Morgan, said, “BOJ did not mention details regarding the policy rate.”

Speed of Japan’s Rate Hikes... Different from the U.S. and Europe

The market expects BOJ to take a different path from the aggressive rate hikes adopted by the U.S. Federal Reserve (Fed) and the European Central Bank (ECB) in 2022 to curb inflation caused by COVID-19. This is because Japan’s inflation is slowing relatively quickly, and consumer spending remains sluggish. Japan’s core Consumer Price Index (CPI) in January rose 2.0% year-on-year, marking a decline in the rate of increase for three consecutive months. Japan’s real Gross Domestic Product (GDP) in Q4 last year (October-December) rose only 0.1% quarter-on-quarter.

Major foreign media forecast, “This means that even if rates rise soon, they are likely to remain very low in the near future,” and “BOJ will not be pressured to continue rate hikes at a faster pace after the first increase.” Shinichi Uchida, BOJ Deputy Governor, also recently said, “Because inflation expectations have not yet anchored at 2% after a long period of deflation and recession, Japan’s situation cannot be compared to that of the U.S. or Europe,” and “Even if BOJ ends the negative interest rate policy, it is hard to imagine a path of continued rapid rate hikes.”

Thus, attention shifts to how slowly BOJ will raise policy rates. The International Monetary Fund (IMF) recommends that BOJ raise policy rates over the next few years but advises the process should be gradual. Gita Gopinath, IMF First Deputy Managing Director, said, “Considering the history of deflationary pressures, it is appropriate to proceed cautiously with the pace of rate hikes.”

Morgan Stanley expects the policy rate to rise to 0.25% by July. Swiss investment bank UBS forecasts the policy rate will remain at 0% or 0.1% until 2025.

Wage Negotiations: An Important Puzzle in the Pace of Tightening

This year’s wage negotiations in Japanese companies are expected to be an important puzzle in the pace of tightening. According to Rengo (Japanese Trade Union Confederation), Japan’s largest labor union organization, the union-side wage negotiation rate in this year’s spring wage talks (Chuntu) was 5.85% as of the 4th, the highest level in 30 years. It is also reported that large companies have signaled significant wage increases. However, since 70-80% of Japanese workers are employed by small and medium-sized enterprises (SMEs), the government emphasizes the urgent need for wage increases in SMEs. While SME unions demanded a 5.97% wage increase, pessimism is spreading that negotiations will be difficult due to business conditions.

Kazuo Momma, chief economist at Mizuho Research Institute and former BOJ monetary policy chief, pointed out, “For BOJ’s second policy rate hike to be justified, wage increases in SMEs need to be stronger.” Inflation must ease and real wages must rise for household consumption to recover in the second half of this year, which could lead to another rate hike by the end of the year.

This content was produced with the assistance of AI translation services.