BoJ Deputy Governor Shinichi Uchida delivered two key messages in his speech: the end of negative rates is imminent but monetary policy will remain "highly accommodative" for the foreseeable future. That said, he hinted that the Bank's policy stance would shift if it became clear that Japan’s inflation dynamics are changing.
He began by addressing the question of whether wages will rise in line with inflation, commenting "On this score,… Japan has seen more favourable developments than last year" and that developments in the spring wage negotiations “will become clear in due course also in
the form of actual figures". He also gave a positive assessment of the progress of pass-through from wage increase to price hikes.
He then stressed that the Bank will need to formulate its communication to ensure continuity in financial markets before and after the policy revision. In that spirit, he went on to "share what I can say at this point regarding questions that have often been asked."
In terms of the policy rate, he explained that, before NIRP was introduced, the BoJ applied a 0.1% interest rate to excess reserves and that the overnight rate hovered in the 0 to 0.1% range, commenting: “If the Bank were to bring this situation back”, that would mean a 0.1pp
rate hike, since the current overnight rate is in the -0.1% to 0% range. Uchida may have started that final sentence with an "if" but his discussion of the pre-NIRP scheme indicates that the Bank plans to restore it. That would probably mean scrapping the multi-tier interest
rate system for reserve deposits in favour of a flat 0.1% on excess reserves and a 0-0.1% target range for the overnight rate. This is what we have been expecting for some time.
Uchida advised that, given the current outlook, "it is hard to imagine a path in which [the Bank] would keep raising the interest rate rapidly".
He noted that the market assumes a very gradual path for the policy interest rate and conceded that "the Bank does not project that inflation will significantly exceed 2 percent" even though it refers to market views when making assumptions on the policy rate to prepare its forecasts. This can be read as broad approval of the market's assumptions. He also pointed out that inflation expectations in Japan are still in the process of climbing toward 2%, so that “an accommodative monetary policy is needed to lift inflation expectations further and to
be mindful of the risk that they would fall again".
That said, he commented: "If Japan's inflation dynamics are to change going forward [...] market views could shift, depending on the speed of the change among other factors". Market views are not the only things that would change if it became clear that Japan's inflation
dynamics are changing: the BoJ's policy stance would also have to adapt, in our view.
As we expected, the move away from negative rates looks unlikely to be accompanied by any declaration of victory about achieving stable 2% inflation, so the Bank will maintain highly accommodative monetary conditions for the foreseeable future. However, we expect the BoJ
will consider incremental change as it gains more confidence about reaching the target.
On the subject of YCC, Uchida said the BoJ will focus on keeping markets stable, "Regardless of whether the framework will be terminated or continued in some way.” If the Bank does revise the framework, it will incline more towards letting interest rates be determined by the
market” … but “it will take careful measures so as not to create discontinuity … and will make sure that the amount of JGB purchases does not change significantly ".
He began by addressing the question of whether wages will rise in line with inflation, commenting "On this score,… Japan has seen more favourable developments than last year" and that developments in the spring wage negotiations “will become clear in due course also in
the form of actual figures". He also gave a positive assessment of the progress of pass-through from wage increase to price hikes.
He then stressed that the Bank will need to formulate its communication to ensure continuity in financial markets before and after the policy revision. In that spirit, he went on to "share what I can say at this point regarding questions that have often been asked."
In terms of the policy rate, he explained that, before NIRP was introduced, the BoJ applied a 0.1% interest rate to excess reserves and that the overnight rate hovered in the 0 to 0.1% range, commenting: “If the Bank were to bring this situation back”, that would mean a 0.1pp
rate hike, since the current overnight rate is in the -0.1% to 0% range. Uchida may have started that final sentence with an "if" but his discussion of the pre-NIRP scheme indicates that the Bank plans to restore it. That would probably mean scrapping the multi-tier interest
rate system for reserve deposits in favour of a flat 0.1% on excess reserves and a 0-0.1% target range for the overnight rate. This is what we have been expecting for some time.
Uchida advised that, given the current outlook, "it is hard to imagine a path in which [the Bank] would keep raising the interest rate rapidly".
He noted that the market assumes a very gradual path for the policy interest rate and conceded that "the Bank does not project that inflation will significantly exceed 2 percent" even though it refers to market views when making assumptions on the policy rate to prepare its forecasts. This can be read as broad approval of the market's assumptions. He also pointed out that inflation expectations in Japan are still in the process of climbing toward 2%, so that “an accommodative monetary policy is needed to lift inflation expectations further and to
be mindful of the risk that they would fall again".
That said, he commented: "If Japan's inflation dynamics are to change going forward [...] market views could shift, depending on the speed of the change among other factors". Market views are not the only things that would change if it became clear that Japan's inflation
dynamics are changing: the BoJ's policy stance would also have to adapt, in our view.
As we expected, the move away from negative rates looks unlikely to be accompanied by any declaration of victory about achieving stable 2% inflation, so the Bank will maintain highly accommodative monetary conditions for the foreseeable future. However, we expect the BoJ
will consider incremental change as it gains more confidence about reaching the target.
On the subject of YCC, Uchida said the BoJ will focus on keeping markets stable, "Regardless of whether the framework will be terminated or continued in some way.” If the Bank does revise the framework, it will incline more towards letting interest rates be determined by the
market” … but “it will take careful measures so as not to create discontinuity … and will make sure that the amount of JGB purchases does not change significantly ".
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Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.