The Bank of Japan (BOJ) is likely to put an end to its eight-year experiment with negative interest rates at either its next meeting on 18–19 March or—more likely—at the following meeting on 25–26 April. That is the view of almost all of the 18 economists polled by FocusEconomics. However, Bank of Japan monetary policy is likely to include only cautious rate rises; the Consensus among our panelists is for a total of 15 basis points of hikes by the end of 2024 and 30 basis points of hikes by the end of 2025.
The end of negative Japanese interest rates
The BOJ’s decision to plunge rates below zero in 2016 was an attempt to cast off decades-long deflation. In part, it has been successful: Inflation has now sat above the BOJ’s 2.0% target for 22 consecutive months. Supporting price pressures further, annual wage negotiations—which were largely concluded on 13 March—between unions and large companies led to an estimated average wage hike of over 4.0 percent, exceeding last year’s figure and the largest since 1992. These factors suggest that the BOJ is likely to hike interest rates in March or April.
A cautious Bank of Japan monetary policy hiking cycle
Nonetheless, our Consensus is for Japanese inflation to dip below the BOJ’s 2.0% target in Q4 2023, suggesting that the BOJ is likelier to wait until April before exiting negative rates and will only hike Japanese interest rates cautiously thereafter. A significant part of the recent spike in inflation has been due to external factors, namely, the jump in commodity prices caused by Russia’s invasion of Ukraine. This year, commodity prices—especially agricultural ones—are set to ease, dampening inflation in Japan in turn. Further pushing the BOJ to adopt a cautious strategy is the potential for turmoil in global financial markets; the Japanese government’s public debt pile sits at around 255% of GDP—higher interest rates could raise market jitters about debt sustainability.
Yield curve control and quantitative easing are other loose ends
As well as exiting from negative rates, Bank of Japan monetary policy includes other loose ends to tie up. One is its soft cap on 10-year bond yields, known as “yield curve control”; an exit from this policy is likely to be taken simultaneously with the exit from negative rates. Another loose end is unwinding its huge quantitative easing program, with the BOJ holding bond and equities worth a whopping 127% of GDP. The BOJ is likely to only gradually offload these assets; around JPY 70 trillion (USD 470 billion) of bonds are expected to mature in the next few years, allowing the BOJ to gradually shrink its balance sheet while still buying assets. The winding down of quantitative easing should also help the BOJ exit its three-tier system for interest rate deposits, which it adopted eight years ago to boost interbank trading and to assuage the hit to banks’ balance sheets from negative interest rates.
Insight from our panelists:
ING analysts said:
“We continue to believe that April has a slightly higher chance of seeing a rate hike than March. We expect to see a change in forward guidance in the statement at the March meeting and possibly an end to the yield curve control policy […]. Ending NIRP will require some kind of policy coordination or agreement between the government and the BoJ, so the central bank won’t rush into a rate hike or ending NIRP in March.”
Nomura analysts commented:
“Previously, we assumed that the BOJ would scrap its negative interest rate policy (NIRP) and its yield curve control (YCC) in April 2024 but thought it would not make any additional interest rate hikes through 2025. However, since we now see greater speed and stickiness in inflation, we expect an additional rate hike of 25bp in October 2024 (we retain our policy rate forecasts for 2025). As a result, our new main scenario is for the scrapping of NIRP and YCC in April 2024 and a 25bp rate hike in October 2024.”
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