BOJ Must Carefully Time, Design Exit from Low Rates – Deputy Gov Himino

REUTERS/Kim Kyung-Hoon/File Photo/File Photo
Bank of Japan Deputy Governor Ryozo Himino speaks during an interview with Reuters in Tokyo, Japan, June 28, 2023.

TOKYO (Reuters) – The Bank of Japan must determine the timing and design of an exit from ultra-loose monetary policy with a careful eye on wages and prices, BOJ deputy governor Ryozo Himino said, signaling that an end to decades of ultra-low interest rates may be nearing.

While signs from various data remain patchy, Japan is making “solid progress” in shifting firms away from practices that kept price and wage growth subdued, Himino said in a speech on Wednesday.

“The BOJ should carefully monitor the evolution of wages and prices, judge the timing of the exit, and design its process,” he said, adding that Japan’s banking system was resilient enough to weather any stress that could emerge during the transition.

If done properly, an exit from ultra-loose policy would reap benefits for a wide range of households and companies through sustained rises in wages and inflation, Himino said, addressing concerns that scaling back stimulus could hurt the economy.

The remarks by Himino, one of the BOJ’s two deputy governors, underscore a growing conviction within the bank that conditions for phasing out its massive stimulus are gradually falling into place.

The BOJ is pursuing a negative interest rate policy, which assesses a 0.1% charge on a pool of excess reserves, and is guiding long-term rates around zero to encourage growth.

Japanese inflation has exceeded the BOJ’s 2% target for more than a year, leading many market players to expect the bank will pull short-term interest rates out of negative territory sometime next year.

During the prolonged period of deflation and subdued price growth, Japanese companies likely saw the risk of raising prices as too high even when raw material costs crept up, Himino said.

Once wages and prices begin to rise in tandem, however, “the barriers for companies to take action will come down and the risks from inaction will rise,” he said.

“If the prevailing norm that price hikes aren’t tolerated starts to dissipate, firms may find it easier to explore a variety of pricing strategies, new initiatives, and ways to develop higher-end products and services and enhance productivity,” Himino said.

A former top bank regulator, Himino assumed his current post in March.