"Japan's Negative Interest Rate Policy Ends After 17 Years"

The Bank of Japan (BOJ), Japan's central bank, is expected to end its large-scale monetary easing policy, including the 'negative interest rate,' for the first time in 17 years by April. Optimistic views on rising inflation and wages within the BOJ are gaining momentum for a rate hike.

On the 6th (local time), major foreign media outlets reported, citing sources, that the BOJ is laying the groundwork to end the negative interest rate and review its ultra-loose monetary policy.

Kazuo Ueda, Governor of the Bank of Japan
Photo by Yonhap News

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A source familiar with the BOJ stated, "Considering the statements made so far, it is reasonable to see April as the target date for ending the negative interest rate." Another source said, "As expectations that the negative interest rate will end rise, the market has accurately interpreted the BOJ's message."

At the Monetary Policy Meeting on the 23rd of last month, the BOJ decided to maintain the negative interest rate policy by keeping the short-term interest rate at -0.1%. At the press conference, BOJ Governor Kazuo Ueda said that the possibility of achieving the goal of stabilizing the consumer price inflation rate at 2% accompanied by wage increases is gradually increasing. The BOJ cites maintaining a 2% inflation rate continuously and achieving a virtuous cycle of wage and price increases as preconditions for ending the negative interest rate.

Also, according to the summary of the minutes from the January Monetary Policy Meeting released on the 31st of last month, some members stated that "the conditions for ending the negative interest rate have been met" and "since the achievement of the target is becoming visible, it is necessary to start full discussions on the exit." They also discussed detailed policy directions after ending the negative interest rate, saying, "It is natural to stop purchasing exchange-traded funds (ETFs) or real estate investment trusts (REITs) once the 2% target is expected to be achieved." These remarks led the market to expect the negative interest rate to end around March or April.

A source explained that optimism about Japan's wage outlook and steady increases in service prices is growing within the BOJ this year. Based on quarterly Short-Term Economic Survey of Enterprises in Japan (Tankan) data and the results of March wage negotiations, future policies are expected to be decided. According to Bloomberg, Japan's largest labor union, the Japanese Trade Union Confederation (Rengo), is aiming for at least a 5% wage increase, while the industry-specific union UA Zensen targets a 6% increase.

However, concerns have been raised about the BOJ's exit strategy. According to a survey of economists, Japan's gross domestic product (GDP) for the fourth quarter of last year is expected to grow 1.4% annually. Consumption is estimated to have increased by 0.1% quarter-on-quarter, and capital expenditure rose by only 0.3%. Core inflation peaked at 4.2% in January last year and slowed to 2.3% in December. The weakening inflationary pressure dampens long-term inflation expectations and may suppress corporate wage increases. Additionally, due to rising raw material prices, it is analyzed that unlike large corporations, small and medium-sized enterprises find it difficult to join the wage increase trend. Regarding this, a third source said, "Japan's economy and inflation are not actually that strong. Ultimately, the timing of the rate hike decision will depend on the data."

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