A growing number of Bank of Japan policymakers is expressing interest in terminating negative interest rates this month, driven by anticipated substantial wage hikes during annual negotiations this year, according to four sources familiar with the Bank's perspectives.
Upon ending negative rates, the central bank is expected to conduct a thorough review of its expansive stimulus initiatives, which include managing bond yields and purchasing riskier assets, the sources indicated.
That being said, this potential shift poses a challenge as there is no unanimous agreement among the central bank's nine members regarding whether action should be taken during the upcoming meeting on March 18-19 or postponed until at least the subsequent gathering on April 25-26, they asserted.
Many Bank of Japan policymakers are closely monitoring the outcomes of major companies' annual wage negotiations with unions scheduled for March 13, as well as the initial survey findings released by Japan’s largest trade union confederation (Rengo) on March 15, to determine the timing of phasing out substantial stimulus measures.
The anticipated significant wage hike will likely elevate the likelihood of measures in March, given that proposals from large companies typically establish the framework for proposals from smaller firms nationwide, according to sources who requested anonymity due to the sensitive nature of the matter.
The BOJ is hoping that the substantial wage increase will spur consumption, thereby bolstering demand and prices following years of economic stagnation and deflation.
Having already established an inflation target of 2%, the Bank of Japan has implemented a policy known as yield curve control (YCC), which includes setting short-term rates at -0.1% and maintaining the 10-year bond yield at approximately 0%.
With inflation exceeding the target for over a year and the outlook for robust wage growth becoming more apparent, numerous market participants anticipate the central bank to terminate its negative interest rate policy either this month or in April.
According to the sources, as short-term rates transition out of negative territory, the central bank is expected to relinquish its 10-year yield target.
To avoid a sudden surge in long-term rates, the Bank of Japan is likely to conduct market intervention if necessary to prevent a drastic increase or provide guidance on the volume of government bonds it will persist in purchasing, they added.
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