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April 9, 2024

Bank of Japan Governor Kazuo Ueda hints at more rate hikes

Following an interview with BOJ Governor Ueda on 3 April, Asahi News published several articles including one that suggests the Japanese central bank could raise rates again between this summer and autumn.
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In-house blogger
Guest blogger
Tetsuo Harry Ishihara
Strategist, Macrobond consultant, and former adviser to Japanese regulators
All opinions expressed in this content are those of the contributor(s) and do not reflect the views of Macrobond Financial AB.
All written and electronic communication from Macrobond Financial AB is for information or marketing purposes and does not qualify as substantive research.

In this blog, I summarize the key takeaways from all the articles and illustrate some of the data points with Macrobond charts.  

Key takeaways 

  • The BOJ discontinued negative rates, yield curve control and ETF purchases in March because it felt closer to attaining the 2% inflation target.
  • Rates could be hiked again as confidence grows and as wage growth influences prices from summer to autumn.
  • The yen's weakness might trigger changes if it significantly affects the wage/price spiral.
  • 2% inflation is interpreted as an average target. 
  • According to Ueda, Japan's inflation trend shows a decreasing likelihood of reverting to 0%, allowing for a reduction in the degree of accommodation.

Meanwhile, the Japanese yen overnight index swap market appears to be pricing in hikes over the next year and beyond as the chart below implies.  

Here are more excerpts translated from Asahi News’s interview with Governor Ueda, complemented by charts I created in Macrobond. 

Asahi News: In the March monetary policy meeting, the large-scale monetary easing that had been in place for 11 years was concluded. What was the rationale behind this decision?

Governor Ueda: The improvement in price movements allowed us to adjust policy accordingly. The extraordinary easing policies had fulfilled their role, and we judged it was appropriate to end them.

Q: Given the anticipated wage growth from the Shunto spring wage negotiations, potentially reaching a 33-year high (refer to the chart below), did this influence your decision? Although the responses are predominantly from large corporations, how do you perceive the situation for small and medium-sized enterprises?

A: "The survey results encompass feedback from small and medium-sized enterprises (SMEs) to a certain degree, showing a notably stronger outcome compared to last year. Typically, SMEs follow the lead of larger corporations in setting trends. The robust survey results from large corporations are likely to positively influence the broader business landscape."

Q: Currently, there's observed weakness in personal consumption, and Q1 GDP may be negative. Are you concerned about these developments?

A: "Although there's a potential downturn in Japan's economic conditions, it doesn't warrant altering our outlook for a gradual recovery. With wages on the rise and inflation decelerating, the forthcoming tax reductions in income and resident taxes this summer are expected to enhance real income, likely leading to some improvement in consumption. The effects of the Shunto wage negotiations will progressively influence wages from this summer to autumn, subsequently nudging up prices. We anticipate a consistent and stable progression towards the 2% inflation target, with the chances of achieving this goal gradually improving."

Q: If the "positive cycle" of wages and prices materializes, might we see more rate hikes within the year?

A: "The decision will depend on the data. Going forward, we aim to return to normal monetary policy, adjusting interest rates to achieve sustainable and stable 2% inflation. This time, we transitioned away from extensive easing because we observed underlying inflation, which excludes transient factors like import prices, nearing 2%. As our confidence in reaching this target grows, it will further justify potential rate hikes."

Q: The exchange rate is weakening. How might this affect your policy decisions?

A: "If the weakening exchange rate is poised to significantly influence the wage-price spiral, it will necessitate a response through monetary policy adjustments."

Q: Is there no chance that the underlying inflation rate could exceed 2%?

A: "Currently, the prospect of inflation distinctly surpassing 2% is relatively low. What we are observing is a gradual decrease in the likelihood of inflation reverting to the 0% norm." 

Q: Will the accommodative policy stance persist even after further rate hikes?

A: "Yes, as long as underlying inflation remains below 2%, maintaining an accommodative environment is essential to encourage its rise. However, we do anticipate a reduced level of accommodation moving forward."

Q: Can you quantify the underlying inflation rate with a specific number?

A: "Even for other central banks, it would be challenging to pinpoint the underlying inflation rate precisely by excluding temporary factors. It's nearly impossible to express it accurately as a percentage. In reality, we rely on monitoring a broad spectrum of data."

Q: Could you reflect on the last 11 years of unconventional monetary easing?

A: "We are currently undertaking a 'comprehensive review' of the last 25 years of monetary policy, so I will delve deeper into that context. For now, I can say that NIRP, YCC and other policies facilitated a shift to a non-deflationary environment by reducing real rates and supporting employment and corporate profits… Having said that, we have to admit that there were side effects, especially to bank profitability and market functioning.”

Q: Some people say that the 2% inflation target should be made more flexible.

A: "The 2% target doesn't dictate that inflation must be precisely 2% at all times, but it does mean that fluctuations should not significantly stray from this figure over extended periods. At present, there are no intentions to modify this target."

Q: In the context of extensive easing, you've been acquiring government bonds (JGBs) and ETFs. What are your plans for these assets?

A: For JGBs, we intend to gradually decrease our purchases and holdings (see chart below), though we cannot disclose specific details yet. The ETFs hold a market value of around 70 trillion yen, making the decision to hold or sell tricky. We wish to avoid large losses and market confusion. 

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