The Bank of Japan (BOJ) board members engaged in discussions regarding the potential timing of the nation’s first interest rate hike since 2007 during their recent meeting. The summary of the meeting suggests that there is no urgency among several members to make the move.
According to one of the nine board members, “It would not be too late even if the bank makes a decision after it sees developments in labor-management wage negotiations next spring.” This sentiment is echoed by the belief that there is only a small risk of underlying inflation surpassing its 2% target significantly.
Another member expressed the opinion that there is now “sufficient leeway” to assess whether a virtuous wage-inflation cycle has been achieved, especially after the bank enhanced the flexibility of its yield curve control mechanism in October.
These perspectives may temper market speculation about whether policymakers will end the world’s last negative interest rate regime at their January meeting. Despite earlier expectations, half of the economists surveyed by Bloomberg now forecast the BOJ to make a move in April, following the assessment of annual wage negotiations expected in March.
The release of the summary led to a weakening of the yen and falling yields, indicating that investors initially adjusted their expectations of an imminent rate hike. Japan’s currency briefly weakened against the dollar, and the yield on 10-year government debt fell.
While some opinions in the summary pointed to progress toward the 2% target, others highlighted the risks associated with a rapid tightening, keeping BOJ watchers on alert for potential surprises.
The diversity of opinions within the BOJ may explain why there seems to be no rush to make a move, as noted by Mari Iwashita, chief market economist at Daiwa Securities. However, she observed an increase in the use of the words “exit” and “normalization” in the summary, indicating that the BOJ is moving closer to paring back stimulus.
As the BOJ gears up for its next policy meeting in January, discussions on the timing of the exit from the current monetary policy and the appropriate pace of raising policy interest rates will likely continue. Approximately 15% of economists surveyed before the BOJ’s December meeting anticipated the removal of the negative rate in January.
