A flag flutters at the Bank of Japan headquarters, in Tokyo, on Jan. 23.KAZUHIRO NOGI/Getty Images
The Bank of Japan will likely end its risky asset purchases but avoid raising interest rates rapidly when scaling back monetary support, Deputy Governor Shinichi Uchida said in the strongest hint to date that an end to its massive stimulus was nearing.
Service-sector prices are rising as more companies hike wages and pass on rising labour costs, Uchida said, signalling his growing conviction that conditions for phasing out stimulus were falling into place.
“If sustainable and stable achievement of our 2 per cent inflation target comes in sight, the large-scale monetary easing will have fulfilled its role and we’ll explore whether it should be revised,” Uchida said in a closely-watched speech in Nara, western Japan, on Thursday.
Ending negative interest rates, a move markets expect to happen either in March or April, would be equivalent to hiking short-term interest rates by 0.1 per cent percentage point, he said.
“Even if the BOJ were to end our negative interest rate policy, it’s hard to imagine a path in which it would then keep raising the interest rate rapidly,” Uchida said.
The remarks by Uchida, which were closely watched by markets due to his record of dropping key policy hints, heighten the chance the BOJ will soon pull short-term interest rates out of negative territory and overhaul other parts of the stimulus framework.
Uchida has been considered by markets as among those in the board more cautious about an early exit. In July last year, he said ending negative rates would be appropriate only when demand-driven inflation becomes too strong.
However, his comments on Thursday indicate increasingly hawkish thinking in the BOJ’s nine-member board.
All the same, the yen and Japan’s 10-year government bond yield fell, while the Nikkei stock average rose after the speech as investors reacted to his remarks ruling out the chance of rapid rate hikes.
“It sounds as if the BOJ is laying the groundwork for ending negative rates to minimize any market shock when it actually moves,” said Toru Suehiro, chief economist at Daiwa Securities.
“An end to negative rate has become a given,” he said, predicting April as the most likely timing of an exit.
Under its stimulus programme, the BOJ guides short-term interest rates at –0.1 per cent and the 10-year government bond yield around 0 per cent. It also buys government bonds and risky assets to pump money into the economy.
As markets price in the chance of a near-term end to negative rates, investors are shifting their attention to the pace of subsequent interest rate hikes and the order in which the BOJ could remove other aspects of its stimulus framework.
Uchida said it would be “natural” for the BOJ to end its purchases of risky assets such as exchange-traded funds (ETF) and trust funds investing in property, once it judges that sustained achievement of 2 per cent inflation is within sight.
He also said the BOJ would not sharply reduce the amount of government bond purchases, and ensure long-term interest rates do not spike abruptly, upon ending its bond yield control.
“If the BOJ does revise the framework, it would incline more toward letting market forces determine interest rates,” Uchida said. “In doing so, however, it will take careful measures so as not to create discontinuity before and after the revision.”
Once the BOJ judges that conditions for shifting policy have been met, it will look comprehensively at each tool and decide how best to overhaul the stimulus package, Uchida said.
“The future interest rate path will depend on economic and price developments ahead,” he told a news conference later on Thursday, when asked whether the BOJ would forgo hiking rates for some time after ending negative rates.
A career central banker, Uchida has been deeply involved in crafting many elements of the BOJ’s massive stimulus programme including negative interest rates and yield curve control (YCC). His views are thus seen as key to the timing and means of dismantling the programme.
The BOJ has been laying the groundwork to end negative rates by April and overhaul other parts of its ultra-loose monetary framework, but is likely to go slow on any subsequent policy tightening amid lingering risks, sources have told Reuters.