BOJ rate hike on Tuesday is now widely expected after wages jump

BANK of Japan (BOJ) governor Kazuo Ueda and his board have one more day to decide if it is time for the nation’s first interest rate hike in 17 years amid simmering speculation that it will proceed.

Some 90 per cent of BOJ watchers sees the risk of authorities ending the negative rate on Tuesday (Mar 19) at the meeting’s conclusion, with that likelihood bolstered after the nation’s largest union group announced first-round results to annual wage negotiations that far exceeded expectations.

It is a monumental moment for Japan. The board is weighing whether to end an era that saw the most aggressive monetary easing in modern history. In addition to a potential departure from the -0.1 per cent negative rate, the fate of a slew of extraordinary tools including yield curve control and massive asset purchases is hanging in the balance.

The policy experiment’s near-term demise is a near certainty.

“Chances have risen for the BOJ to choose March,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Research Institute. “Waiting until April would be meaningless if the market is going to price in the move at 100 per cent if they don’t act this time.”

If the central bank moves in March it is widely expected to switch its policy rate to the overnight unsecured call rate and set it in a range between zero and 0.1 per cent.

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BOJ officials are also considering ending their buying of exchange-traded funds and real estate investment funds, though they will continue to buy government debt to maintain stability in the bond market, according to sources familiar with the matter.

Markets are primed to turn on the BOJ decision, with a rate-hike on Tuesday potentially providing near-term support to the yen. Strength in the currency would be liable to weigh on stocks, which have benefited from the cheap yen.

Opinions among traders and economists have vacillated in recent days in parallel to swings in volatile swap rates that reflect expectations for policy change.

There was no unanimous view even inside the bank as recently as early last week, according to people familiar with the matter. That was before the federation of unions, Rengo, announced on Friday that its members had secured wage increases of 5.28 per cent on average, far above the 4.1 per cent predicted by economists surveyed by Bloomberg, and marking the biggest gains in more than 30 years.

A delay may trigger a sharp weakening in the yen in the short-term, possibly even back past 150 to the US dollar and into an area of concern for the government.

The wage hikes were seen as the final data set for the board to consider as part of its deliberations, sources familiar with the matter told Bloomberg ahead of that news.

Japan’s benchmark 10-year sovereign bond yield edged higher late Friday after the wage results. Some investors see the 10-year yield rising above 1.25 per cent by year’s end as the BOJ changes direction.

Worker pay gains play a critical role as the BOJ pursues a goal of achieving 2 per cent sustainable inflation. Increases that outpace inflation could be the catalyst that sets in motion a virtuous cycle in which wage growth feeds into demand-led price gains.

Even with the pay momentum, Ueda has the option of waiting another month. Unlike his global peers, the BOJ governor faces little risk of the sort of runaway inflation that prompted aggressive tightening in the US and Europe. Data due Friday are expected to show consumer price growth accelerated in February, but the pace is forecast to stay under 3 per cent, with much of the gain largely due to base effects.

Those touting April as the likely timing maintain there’s no rush. The bank will get a large volume of data just ahead of the Apr 25 to 26 gathering, making that meeting an opportune time to move, former BOJ Chief Economist Kazuo Momma said.

There could be mixed views on the board. If Ueda pushes for a landmark decision to lift off tomorrow, he may not get a unanimous consensus. So far he’s refrained from dropping clear hints on his preferred timing, merely repeating his pledge to take appropriate steps after a comprehensive review of the economy.

Since taking the helm in April last year, Ueda has proven to be a nimble operator. Within about six months, he eliminated the biggest headache of the current policy framework by adding flexibility to the yield curve control mechanism on two occasions. That pre-empted the sort of massive bond sell-off seen in Australia when the Reserve Bank of Australia made adjustments in 2021.

At the same time, Ueda is known for having voted against ending zero interest rates back in 2000, when he was one of nine board members. That exit step, which the bank conducted in the face of government opposition, was slammed as premature. It amplified doubts over the BOJ’s commitment to supporting the economy until Ueda’s predecessor Haruhiko Kuroda launched a massive easing programme in 2013.

Times have changed. Ueda faces no such opposition this time. Japan’s key inflation gauge has stayed at or above BOJ’s 2 per cent inflation target for 22 months, generating ire among consumers frustrated over falling real wages, and helping to sink support ratings for Prime Minister Fumio Kishida.

“It is all up to Ueda,” said Masaaki Kanno, former BOJ official and chief economist at Sony Financial Group. “After navigating the BOJ this far to be able to end the negative rate whenever it wants, there is no big difference for the overall economy whether it’s in March or April.”

Whenever the negative rate goes away, one thing is abundantly clear: Policy settings will remain accommodative. Ueda and his fellow board members have reiterated this point a number of times in an effort to prepare the market for what’s coming.

On the other hand, what exactly the new setting might be is open to question. Some 67 per cent of surveyed economists predict the new policy rate setting will be between 0 per cent and 0.1 per cent. Another 16 per cent predict it will be around 0 per cent, while 10 per cent think it will be set at about 0.1 per cent.

They forecast the terminal rate is 0.5 per cent, and about half forecast the pace of hikes to be once or twice a year, whereas the other 51 per cent say it is hard to tell, according to a Bloomberg survey.

“The BOJ will explain it is still accommodative even after adjusting its large-scale easing,” said Mari Iwashita, chief market economist at Daiwa Securities. “Even if they can raise rates again, that will probably be in autumn at the earliest.” BLOOMBERG