©Reuters. FILE PHOTO: Bank of Japan Governor Kazuo Ueda speaks during a group interview with media in Tokyo, Japan, May 25, 2023. REUTERS/Kim Kyung-Hoon/File Photo
By Leika Kihara
TOKYO (Reuters) – Policymakers at the Bank of Japan are increasingly talking about the need to move away from the massive monetary stimulus of the past decade, even as rising global risks add to concerns about a fragile economic recovery.
A series of hawkish comments from BOJ speakers in recent weeks suggest the bank is preparing markets for an eventual policy change amid growing price pressures in deflation-prone Japan, analysts say.
Even dovish members of the BOJ board have expressed openness to discussing a long-awaited exit from former Governor Haruhiko Kuroda’s ultra-dovish policies, recognizing that changes in conditions could warrant an adjustment in the monetary environment.
Governor Kazuo Ueda said in a newspaper interview on Saturday that the BOJ could have enough data by the end of the year to assess whether the conditions exist to raise short-term interest rates.
Ueda’s comments, which pushed yen and bond yields higher on Monday, followed those by BOJ board member Naoki Tamura last month, which suggested the bank could safely raise short-term rates without hurting the economy.
“Even if the BOJ were to end negative rates, it will not scale back monetary easing as long as it can keep rates low,” said Tamura, a former commercial bank executive.
The commentary contrasts in tone with the pro-growth stance adopted under Kuroda, a proponent of aggressive monetary easing to pull Japan out of its deflationary mindset.
It also suggests that the BOJ under Ueda will be more inclined to prioritize unwinding the Kuroda-era policy framework blamed for distorting bond markets and crushing bank margins.
“The BOJ will announce that Japan has reached 2% inflation in April and will end negative interest rates,” said Mari Iwashita, chief market economist at Daiwa Securities and a veteran BOJ watcher.
To be fair, the BOJ is in no rush to phase out stimulus until there is sufficient data to suggest the economy can withstand the impact of weakening global demand and allow companies to maintain wage levels increase, say three sources familiar with her thinking.
But mounting signs of change in Japan’s deflation-prone economy are making policymakers more open to discussing the hurdles to an exit, a sign they say the moment of decision-making is approaching.
Inflation has been above the BOJ’s 2% target for more than a year as companies pass on higher costs to households. Companies also offered the biggest pay increases in three decades.
Even pigeons on the nine-member board have noticed these changes.
“I believe the Japanese economy is finally seeing the first signs of achieving the BOJ’s 2% inflation target,” said Hajime Takata, one of those board members.
“We must patiently maintain the current enormous monetary stimulus. At the same time, we must respond nimbly to uncertainties as we see the first signs of a virtuous cycle between wages and inflation,” he said.
Another board member, Junko Nakagawa, outlined the conditions for ending negative interest rates, particularly a sustained improvement in household confidence.
“If we see that many people share the outlook that wages will continue to rise, we may be able to get out of (negative rates).”
NO PRE-SET TIMING
Since Ueda took over in April, there has been steady progress toward gradually phasing out stimulus measures. The BOJ adjusted policy in July to allow long-term interest rates to rise more sharply to reflect higher inflation.
The next step would be to abolish or increase the 0% interest rate target and increase the short-term interest rate from -0.1%.
Recent comments from policymakers suggest the BOJ could act sooner than markets expect. A majority of analysts polled by Reuters in August saw the BOJ only scaling back stimulus within a year. Less than half expect negative interest rates to end in 2024.
However, there appears to be no consensus within the BOJ board on when and 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 on ending negative rates, saying last month there was “still a long way to go” before the conditions were met.
Wage prospects for next year remain crucial.
Japanese companies traditionally start their ‘shunto’ wage negotiations with unions in March. But the BOJ could get information through its regional offices and comments from company executives on wage prospects ahead of those talks, the sources said.
The global outlook would also be crucial as a downturn in the US and Chinese economies hurts manufacturers and discourages 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 is unlikely to have a predetermined timing in mind for when it can take the next step.”