BOJ Lays Groundwork For Change in Monetary Easing Policy; Deputy Gov. Uchida Offers Reassuring Clues in Speech

By Shinichi Ikeda / Yomiuri Shimbun Staff Writer

2:00 JST, February 10, 2024

The Bank of Japan is laying the groundwork for a change in its large-scale monetary easing policy. BOJ Deputy Gov. Shinichi Uchida emphasized in a speech on Thursday that the central bank will continue its accommodative monetary policy even after it ends its negative interest rate policy.

His remarks reassured financial markets, which were keeping a cautious eye on the BOJ’s moves as they considered the possibility of a policy change in March or April and worried about a subsequent rapid increase in interest rates.

However, as no new clues were given on the timing of the policy change in Uchida’s speech, financial markets are likely to continue to watch the BOJ’s moves closely.

Uchida spent about one-third of Thursday’s speech in Nara explaining the BOJ’s monetary policy management. Regarding current monetary easing measures, Uchida said that “if sustainable and stable achievement of the 2% [inflation] target comes in sight, the large-scale monetary easing will have fulfilled its role and the Bank will explore whether it should be revised.”

Immediately after that, Uchida said, “The first question is how to set the short-term policy interest rate if the Bank terminates its negative interest rate policy.” He added, “If the Bank were to bring this situation back, this would mean a 0.1 percentage point interest rate hike, since the current uncollateralized call rate is in the range of minus 0.1 to 0%.”

Financial markets appeared to particularly react to his next remark. Uchida clearly said that “even if the Bank were to terminate the negative interest rate policy, it is hard to imagine a path in which it would then keep raising the interest rate rapidly. The Bank would, I think, maintain accommodative financial conditions even if the termination were to take place.”

These remarks refuted views held by some investors that interest rates would continue to rise after the policy change.

Financial markets were volatile from 10:30 a.m. on Thursday, when a transcript of Uchida’s speech was uploaded on the BOJ’s website. The Nikkei Stock Average surged more than 600 points on Thursday morning from Wednesday’s close and its closing price hit its highest level in 34 years, since February 1990.

Teppei Ino, chief analyst at MUFG Bank, said, “Mr. Uchida carefully explained BOJ policy after the central bank’s expected policy change. The BOJ’s policy change is probably just a matter of time. Mr. Uchida seemed to aim at promoting understanding among financial markets and the public.”

Trends in Wage Increases

The key to the BOJ’s policy change is the trend in corporate wage increases. At a press conference after the speech, Uchida said that he considered the shunto spring wage negotiations to be an important event as the BOJ can observe it to gauge conditions in companies.

During this year’s shunto, wage hike trends at large companies should become clear on March 13, as many big firms are scheduled to present answers to their unions’ pay demands on that day.

Then, on April 1, the BOJ’s quarterly Tankan report will be released, indicating wage increase trends among small- and mid-sized companies.

Based on that calendar, many market participants expect that the BOJ’s monetary policy decision will likely be made at the April 25-26 Monetary Policy Meeting after a wide range of corporate wage hikes have been revealed.

At the April BOJ meeting, the Bank will decide on and announce its quarterly Outlook for Economic Activity and present its forecast for the inflation rate in fiscal 2026. If the forecast is around the BOJ’s goal of a sustainable and stable price inflation rate of 2%, the projection could serve as one of the grounds for the policy change.

However, some BOJ officials believe that the central bank should make a policy change as soon as possible if it can confirm prospects for achieving the target for price stability, indicating a possibility that the monetary policy change is likely to be made at the BOJ Monetary Policy Meeting on March 18-19.