BOJ Rate Hike Speculation Points to End of Negative Rates

Rising Wages and Speculation on BOJ Rate Hike

The Bank of Japan (BOJ) is currently in the spotlight as speculation mounts regarding a potential rate hike, signaling a possible end to the era of negative interest rates that the country has experienced. This move, if materialized, could have far-reaching implications for Japan’s economy, shaping wage negotiations, inflation trends, and the value of the yen.

Wage negotiations play a crucial role in the BOJ’s monetary policy decisions, especially amidst speculations of ending negative rates. These negotiations hold the key to determining future wage trends, as potential changes in annual wage rates could signal shifts in the overall economic landscape. Union groups are actively involved in wage neogiations take place in the Spring including the largest umbrella group of unions, Rengo. Unions factor in inflation in previous year to negotiate for hikes.

Summary and Key Points on BOJ Rate Hike and Our Expectations

The Bank of Japan (BOJ) is speculated to exit its negative rate policy soon, with expectations of a rate hike in April. The BOJ has maintained an ultra-accommodative monetary policy since 2016, despite inflation concerns and a fragile economic growth outlook. Market participants are anticipating a shift in the BOJ’s policy stance, with a focus on wage increases, inflation, and the potential impact on the economy.

In anticipation of this potential policy change, the Japanese Yen strengthened to the 147 level against the dollar on the 7th of March. At the same time the Nikkei Stock Exchange sold off by 500 points. A stronger Yen hit the stocks of exchange rate sensitive exporters.

We expect the BOJ to move very slowly to assess the annual Spring wage negotiations in more depth plus wait for key economic data such as the Tankan Q1 Survey. Our projection is that the Japanese Yen will appreciate as the BOJ normalizes its monetary policy.

Key Points:

• Speculation around BOJ potentially moving to exit its negative rate policy at the upcoming March meeting and considering a rate hike in April.
• Despite concerns about inflation and fragile economic growth, BOJ has kept ultra-accommodative monetary policies in place since 2016.
• Wage increases, inflation, and market repositioning are key factors impacting BOJ’s monetary policy decisions. Even with the core inflation that excludes energy and food more than the 2% target for about a year, the BOJ has not budged from its ultra-accommodative monetary policy. The largest umbrella group of unions, Rengo, has demanded 5.85% which is more than the 3.8% negotiated last year.
• Market participants are looking beyond the timing of the policy change, focusing on the future path of BOJ’s policies and potential impacts on the economy. The danger is if the BOJ does not act as a result of high wage pressure, market confidence in the BOJ will mean that the Yen will face depreciation.
• There is anticipation of the BOJ abandoning yield curve control policy and offering numerical guidance on government bond purchases to avoid market disruptions. Currently, the interest rates stand at -0.1% (negative rates) with an upper limit of 1% for the 10-year Japanese government bond.