The recent powerful earthquake in Japan on New Year’s Day is creating hurdles for the Bank of Japan (BOJ) to proceed with its plans to abolish negative interest rates. Morgan Stanley MUFG Securities Co. has revised its projection for the BOJ rate decision this month, now anticipating the central bank to maintain the current policy. This adjustment is attributed partly to the need for the BOJ to evaluate the adverse effects of the Noto Peninsula disaster on the country’s economy. Analysts suggest that any policy change may not occur until April at the earliest, according to Mitsubishi UFJ Morgan Stanley Securities Co.
The yen is experiencing renewed downward pressure following the earthquake, weakening to 143.39 per dollar in Tokyo on Thursday morning, compared to 141.04 at the end of 2023 in New York trading. Initially expected to strengthen in 2024, the yen’s trajectory is now uncertain due to the unexpected challenges posed by the earthquake.
Daisuke Karakama, Chief Market Economist at Mizuho Bank Ltd., noted, “Although there must be quite a few foreign investors who have been anticipating the end of negative rates in January, under these circumstances, the BOJ will almost certainly not move this month.” The earthquake’s impact on production activity and the potential need for a supplementary budget for recovery measures contribute to the reassessment of the timeline for ending negative rates. Karakama suggests that if negative rates are not lifted in January, the prospect of doing so in the first half of 2024 becomes doubtful.
Mari Iwashita, Chief Market Economist at Daiwa Securities Co., has also adjusted her forecast, removing the expectation for an end to negative rates in January. The earthquake’s implications for production activity and the potential government response in the form of a supplementary budget have led Iwashita to anticipate a potential exit from negative rates in April.
BOJ Governor Kazuo Ueda emphasized the central bank’s commitment to supporting the financial system after the earthquake, expressing hope for balanced increases in wages and inflation in the coming year. Unlike the coordinated intervention in 2011 following a deadly earthquake and tsunami, the response to the current earthquake is expected to differ due to changes in Japan’s economic dynamics, including trade surpluses and corporate demand for the yen.
The evolving situation underscores the complexity of the BOJ’s monetary policy decisions amid unforeseen external challenges, shaping the landscape of Japan’s economic outlook and the yen’s trajectory in the global market.
