The Bank of Japan’s Potential Rate Hike After Years: What You Need to Know

According to four sources familiar with the Bank of Japan’s thinking, a growing number of policymakers are expecting hefty pay increases in this year’s annual wage negotiations.

According to experts, the central bank will also restructure its massive stimulus program, which includes buying riskier assets and controlling bond yields.

Following years of economic stagnation and deflation, the BOJ is hoping that wage increases will encourage consumers to spend more.

It may not be necessary for the BOJ to wait until April if the spring wage negotiations succeed, one source said.

It is expected that the Bank of Japan will end its monetary easing policy on Monday and Tuesday, Nikkei reports, marking its first rate hike since February 2007.

This year, big corporations and their labor unions agreed to substantial wage increases, which gives the BOJ an opportunity to normalize its monetary policy.

A collaboration between the BOJ and its external partners began Friday on ending its negative rate policy, adopted in February 2016. To guide short-term interest rates to 0%-0.1%, there is a plan to increase the policy rate, which is currently at negative 0.1%, by over 0.1 point.

Certain deposits by financial institutions are subject to the BOJ’s negative rate policy. The BOJ is currently the only central bank in the world that employs negative rates, seen as a symbol of its massive monetary easing.

In considering ending negative rates, BOJ governor Kazuo Ueda has said this spring’s wage negotiations will play a critical role.

According to the first tabulation of results from this year’s annual wage negotiations, the Japanese Trade Union Confederation, or Rengo, said Friday that the hikes averaged 5.28%, the highest in 33 years. The average raise among smaller companies was also 4.42%. 

The BOJ believes that economic conditions are now conducive to maintaining inflation at 2%, with base pay increases also averaging 3.7%. 

In order to support inflation and boost consumer purchasing power, the BOJ is focused on wage trends.

On Tuesday, Ueda said the bank is in the final stages of considering whether to exit negative interest rates based on the virtuous cycle of wage hikes and inflation.

According to a BOJ source, this year’s wage hikes “are of a level that even reflationists who are coy about changing monetary policy will accept a change.”

A key tool of the bank’s massive monetary easing is expected to be scrapped when it exits negative rates and yield curve control. 

The purchase of exchange-traded funds and real estate investment trusts would likely cease.

Since last year, the BOJ has been laying the groundwork for ending negative rates. According to Deputy Governor Shinichi Uchida, overall monetary policy will remain accommodative even if the BOJ ends its negative interest rate policy. Hajime Takata, member of the policy board, said on Feb. 29 that sustained inflation of 2% is within reach.

A March exit from negative rates is becoming more likely among government officials. There is no need to wait until April to exit, according to a senior Finance Ministry official.

Various central banks around the world have increased interest rates rapidly to curb inflation in response to Russia’s invasion of Ukraine in February 2022. Although the Bank of Japan has not raised rates since February 2007, it has maintained a policy of monetary easing. Companies and households would be affected by the BOJ’s exit from negative rates, as well as the global flow of money.