Japan: BoJ prepares to end negative interest rates

by Leika Kihara

TOKYO (Reuters) – The Bank of Japan (BoJ) could end eight years of negative interest rates and other measures linked to its ultra-accommodative monetary policy on Tuesday, in a historic shift for the bank central in its fight against deflation.

According to analysts, even considering an increase in the BoJ’s main key rate, which would be a first in 17 years, it would remain close to zero, with the economic recovery in the archipelago still fragile.

Such a decision would, however, allow Japan to no longer go against the grain of other major central banks, which have all long since abandoned negative rates, intended at the time to support the economy, thanks to cheap money. and unconventional monetary tools.

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While a majority of economists surveyed earlier this month thought it would take April for the BoJ to begin this pivot, sources say the larger-than-expected wage increases announced by big companies last week have now increased the likelihood that the central bank will make this decision as early as Tuesday.

If the nine-member board of governors judges that the conditions are met, the BOJ will set the overnight rate target in a range of 0% to 0.1%, with a remuneration of 0.1% on excess reserves of financial institutions deposited with the central bank.

SYMBOLIC MEANING

“This would be the first rate hike in 17 years, so it has great symbolic significance,” said Izumi Devalier, specialist in the Japanese economy at BofA Securities.

“The real impact on the economy is, however, very small,” she added, noting that the BOJ would likely emphasize its desire to maintain accommodative monetary conditions.

By abandoning negative rates, the BoJ would also abandon its policy of controlling the yield curve and its purchases of risky assets such as ETFs (exchange-traded funds), sources told Reuters. This would put a formal end to the program launched since 2013 by the former governor of the central bank, Haruhiko Kuroda.

The BoJ could nevertheless wait until April if a majority within its board of governors deems it necessary to study more data before taking this more restrictive turn.

A survey this month shows that 35% of economists expect the BoJ to end negative rates on Tuesday, following its two-day monetary policy meeting. This represents a spectacular rise from 7% the previous month, but this figure is still below the 62% who expect such a decision only at the next meeting, on April 25 and 26.

However, with the end of negative rates almost no longer in doubt, the market is especially on the lookout for signs that the BoJ could give on the pace of rate increases expected beyond the first increase.

IMPACT ON FINANCIAL MARKETS?

The stakes are high because rising bond yields would increase the cost of financing Japan’s huge public debt, whose ratio as a share of gross domestic product (GDP) is the largest among advanced economies.

The end of Japan’s ultra-accommodative monetary policy could also have an impact on global financial markets, as Japanese investors, who have accumulated investments abroad in search of returns, may be tempted to repatriate their capital domestically. archipelago.

To reassure the markets, the BoJ will undoubtedly have to work to make it clear that the end of negative rates will not be the prelude to an aggressive rise in the cost of credit as observed in recent years in the United States.

The central bank’s new guidelines should appear in the press release of its monetary policy decision or in the announcements of BoJ Governor Kazuo Ueda, who will hold a conference on Tuesday from 6:30 a.m. GMT.

Under the mandate of Haruhiko Kuroda, the BoJ implemented a vast asset purchase program in 2013, the aim of which was initially to raise inflation towards the 2% target within around two years.

The central bank then opted in 2016 for negative rates and control of the ten-year Japanese sovereign yield curve in a context of persistently low inflation which forced it to adjust its recovery program to a longer term objective.

Faced with the sharp fall in the yen, which has driven up the cost of imports and intensified criticism over the impact of ultra-low interest rates in Japan, the BOJ decided last year to ease its policy again control of the yield curve.

(Reporting Leika Kihara; French version Claude Chendjou, edited by Blandine Hénault)