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February 20, 2024

The Bank of Japan drops more hints about NIRP

Lift-off from negative rates could come as soon as April.
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Tetsuo Harry Ishihara
Strategist, Macrobond consultant, and former adviser to Japanese regulators
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Keith Campbell

According to Governor Ueda, the Shunto spring wage offensive and the outlook for service inflation are the two key triggers to watch. After lift-off, the Kishida administration may try to declare victory over deflation, but four conditions may need to be met first.

The hints about a possible lift-off from the Bank of Japan’s negative interest rate policy (NIRP) seem to be getting louder and more detailed. They are also coming from BOJ Governor Ueda and Deputy Governor Uchida themselves. Note that Uchida led the powerful monetary affairs department - which proposes monetary policy - when QQE (quantitative and qualitative monetary easing) began in 2013, and is seen as one of its {{nofollow}}architects.

Here are some noteworthy comments from Ueda and Uchida as reported by the Nikkei and NHK   from late December through this month. (The dates reflect the day the comments were made, not the date of the article.) Note the repeated references to Shunto – the annual spring wage negotiations between unions and employers. 

  • “The Shunto spring wage offensive and the effects of recent wage growth on service inflation are the two key triggers.” (Ueda, Dec. 26)
  • “Even if we achieve lift-off from NIRP, it is hard to imagine it will be followed by a series of rate hikes.” (Uchida, Feb. 8)
  • “At the moment, we expect to continue an easy monetary environment even if lift-off occurs.” (Uchida, Feb 8 and Ueda, Feb. 9)
  • “Shunto will be a major determinant of whether we achieve 2% inflation via a wage-price spiral.” (Uchida, Feb. 8)
  • “The conditions surrounding Shunto this year are better than last year … the labor shortage is tighter, corporate profits are at record highs, and both corporates and unions are relatively positive about Shunto.” (Uchida, Feb. 8)
  • Rate hikes following lift-off “will be swayed by how wages affect inflation” (but) “at the moment we expect to continue an easy monetary environment.” (Uchida, Feb. 8)
  • “(If lift-off means returning to pre-NIRP levels) That means a hike of 0.1%” (Uchida, Feb. 8)
  • Even if yield curve control is ceased, “a sudden stop to bond purchases is unimaginable and purchases will continue” to prevent interest rate spikes (Uchida, Feb. 2024) 
  • If aggressive easing measures are slowed, ETF purchases “can naturally be expected to end.” (Uchida, Feb. 2024) 

The two triggers

Ueda has highlighted Shunto and service inflation as the two key triggers for lift-off more than once. 

Initial Shunto results are expected in mid-March, and an estimated average of major think tank views show a wage increase approaching 4% –even stronger than last year, as the first chart shows. 

Executives predict even bigger wage gains. Nikkei’s Shunto expectations survey of 100 CEOs, published on Dec. 27, showed that 35% of corporate bosses expected wage growth of 5 to 6 percent, while 19% expected 4 to 5 percent. And several major companies have already announced intentions to hike by 7 percent. 

Meanwhile, service inflation has passed the benchmark of 2 percent, probably helped by a labor shortage in accommodations, retail and healthcare, as the next chart shows.

Mark your calendar for April

The consensus for lift-off remains centered around April. Although the initial Shunto results are expected in mid-March, an end to NIRP in March might be inconvenient for corporate and bank balance sheets, given the fiscal year ends on March 31. 

Also, April should provide even more evidence of wage growth, including the BOJ’s regional reports on local businesses and a fresh Tankan corporate wage survey. April also brings the quarterly BOJ Outlook Report, which historically has tended to coincide with major policy changes. 

The April report will reveal the BOJ’s consensus outlook on core inflation for FY26. The central bank’s January report had FY23 inflation at 2.8%, FY24 at 2.4%, and FY25 at 1.8%. Note that core CPI has been slowing since early 2023 and dipped below 2%, as has the Tokyo-only version of this inflation measure, but this is driven by energy subsidies. (The BOJ might need to exclude energy subsidy effects in order to say 2% has been achieved.)

Victory over deflation?

The Kishida administration reportedly is seeking to declare a victorious exit from deflation, a “huge” feat, according to the prime minister. On Feb. 9, the Nikkei quoted a BOJ official as saying: “hopefully, the government will announce it sometime around lift-off”. 

Speculation is rife as the Cabinet Office’s four conditions for victory (first announced in 2006!) were thought to have been met last year, though two of them have wobbled recently :

  • Inflation above 2 percent

Core CPI has been above 2 percent.

  • A positive GDP deflator

It is currently positive.

  • A positive output gap (GDP gap)

This has recently turned a touch negative, as the next chart shows.

  • Positive growth in unit labor costs

Also a touch negative, as the subsequent chart shows.

In conclusion, with such clear and detailed comments coming from the BOJ’s top leadership, it would now be a surprise if lift-off does NOT occur in April. This would be the first hike since February 2007 – 17 years ago. 

As for the markets, they appear to like Japan’s inflation revolution, too: record corporate profits have boosted stock valuations (along with some homegrown investor activism).

This article was published in conjunction with Japan Exchange Group (JPX) and the original can be found here.

Related posts:

Can Japan exit deflation? (available {{nofollow}}here or here)

Japan’s inflation revolution (available {{nofollow}}here or here)

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