BOJ seen delaying rate hikes until April next year

BOJ seen delaying rate hikes until April next year

Until April next year, the Bank of Japan may hold off on end-of-negative interest rates until April next year to gauge whether wage gains will broaden enough to maintain inflation sustainablely at its 2 per cent target, said Makoto Sakurai, a former central bank policymaker.

With inflation exceeding 2 per cent for over a year, markets are rife with speculation that the BOJ will raise short-term interest rates from the current -0.1 per cent as early as the end of this year.

Ending negative interest rates likely won't hurt the economy much as inflation-adjusted real borrowing costs will remain low, said former BoJ board member Samurai, who remains close ties with incumbent policymakers.

But the central bank will be in no rush to phase out stimulus because of signs of weakness in Japan's economic recovery, such as sluggish consumption and slower-than-expected capital expenditure.

With much of the world economy facing aggressive interest rate hikes over the past 18 months or so to avoid inflation, the BOJ remains an outlier in maintaining its easy policy stance.

Uncertainty over the US and Chinese economic outlook also gives the BOJ the reason to go slow on rate hikes, Sakurai said.

Sakurai said he had no idea of the situation where the two men were working together.

Even if the central bank ends negative rates, it will likely describe the move as a modest adjustments to the degree of monetary stimulus, he said.

Japan's core inflation hit 3.1 percent in August, ahead of the BOJ's 2 percent target for a 17th consecutive month, as companies hike prices to pass on rising raw material costs to households.

The Bank of Japan's yield curve control policy has heightened expectations that it will soon phase out its yield curve control policy, under which it guides short-term rates at -0.1 percent and the 10-year bond yield around zero.

In July, the government raised a hard cap on the 10-year yield to 1.0 per cent from 0.5 per cent to allow long-term interest rates to rise more freely reflecting higher inflation.

By loosening its grip on yields, the Bank of Japan bought itself time to scrutinise overseas developments and the domestic wage outlook before phasing out stimulus, said Sakurai, a board member who was involved in the adoption of YCC in 2016. In 2021, he left the board and ended his five-year term.

While big companies may continue to offer more substantial salary next year, the key is whether smaller firms can follow suit. Japan's output gap must also be positive for wages to rise in tandem with inflation in a sustainable way, he said.