Bank of Japan Holds Firm: Exiting Negative Rates Not on the Immediate Horizon

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Bank of Japan Board Member Seiji Adachi expressed that it is premature to discuss the exit from negative interest rates. He stressed the importance of waiting until next year to assess the possibility of sufficient wage growth, facilitating a shift from ultra-loose monetary policies.

Given market expectations of a possible increase in short-term interest rates in January, Adachi, known for his dovish stance, underscored the importance of waiting for clear indications of both price and wage rises. This cautious approach aims to maintain inflation at a steady 2% before considering moving away from negative interest rates.

Speaking at a press conference following a meeting with business representatives in Matsuyama, Adachi emphasized the importance of waiting for the results of the yearly wage discussions between companies and unions. This key data, essential for sustainable wage growth, is expected to be available only after the commencement of the financial year in April 2024.

Adachi stressed that Japan has not yet entered the positive cycle of wage growth and inflation required to initiate discussions about a strategy for exiting negative interest rates. According to him, the Bank of Japan may only contemplate such measures if the likelihood of such a cycle increases.

These comments evidence the uncertainty surrounding the timeline for ending the Bank of Japan's negative interest rate policy, which also involves a yield curve control (YCC) system governing 10-year bonds. They also emphasize the lack of consensus within the central bank regarding the timing of the exit.

Naoki Tamura, a representative of the hawkish board members, hinted at the possibility of ending negative rates early next year, citing Japan's apparent proximity of inflation to the central bank's target.

In July and October, the Bank of Japan adjusted its Yield Curve Control, relaxing controls on long-term bond yields. This move was perceived by the markets as a foundation for a gradual departure from ultra-soft policies.

With inflation surpassing its 2% target for over a year, many market players anticipate the Bank of Japan to phase out negative rates and the YCC next year. Some speculations even suggest that this transition could occur as early as January.