Bank of Japan continues to look into exiting its decade-long ultra-loose monetary policy based on whether wage increases and price hikes become widespread and sustainable, Governor Kazuo Ueda spoke to the parliament on Thursday.
Analysts predicted that Japan's inflation-adjusted real wages — which have been declining for the past 18 consecutive months, including September — would continue to fall into 2024 as wage increases fail to keep pace with persistent inflation.
Despite that, Ueda noted that companies are becoming more proactive in raising both prices and wages. This positive development, he said, indicates that Japan is moving closer to achieving the BoJ's inflation target sustainably.
"We expect trend inflation to gradually approach 2 percent. But we'd like to wait until we have more conviction that sustained achievement of our price target comes into sight," Ueda said. "Until then, we will maintain negative interest rates and the yield curve control framework."
Japan's core consumer inflation rate, which excludes volatile fresh food costs, reached 2.8 percent in September, exceeding the BoJ's target but falling below the three percent threshold for the first time in over a year. This decline was attributed to the diminishing impact of past global commodity price spikes.
In its latest estimates released last month, the BoJ adjusted its inflation projections upwardly. It is now anticipating core consumer inflation to reach 2.8 percent in 2023 and 2024 before moderating below two percent in 2025.
YCC adjustment
During the hearing, policymakers also discussed the possibility of gradually reducing monetary stimulus and preparing the groundwork for the potential exit.
In its October 30-31 meeting, the BoJ announced that it would maintain its ultra-low interest rate targets. However, it adjusted its yield curve control (YCC) framework for more flexibility in long-term interest rates.
Under YCC, the BoJ aims to keep the 10-year Japanese government bond yield around zero percent and short-term interest rates at -0.1 percent to stimulate economic growth and achieve its inflation target.
While some members viewed the YCC adjustment primarily as a means to alleviate the adverse effects of YCC, one member said it would also facilitate a "smooth transition" towards monetary policy normalization.
Ueda said the timeline for policy normalization remains uncertain. Although he is confident in Japan's banking system's ability to withstand modest interest rate hikes, he acknowledged the need for cautious monitoring due to prolonged exposure to ultra-low interest rates.
Ultra-loose policy may end next year
Eiji Maeda, a former BoJ executive, said in a recent interview with Reuters that last week's upgrade in price forecasts indicates a sustainable path toward the inflation target. He suggested the possibility of the BoJ ending negative rates as early as January next year if it perceives inflationary pressure is heightening.
Maeda also said that if the BoJ ends its negative interest rate policy, it would likely raise short-term interest rates to a neutral level of around two percent, which is neither stimulating nor inflationary.
"The BoJ could also end yield curve control. In doing so, it may establish guidance pledging to buy government bonds nimbly to counter any spike in long-term rates," he said.
Before implementing negative interest rates and YCC in 2016, the BoJ relied solely on a massive asset-buying program known as "quantitative and qualitative easing" (QQE) to suppress long-term interest rates.
The BoJ is currently the only major central bank globally with negative interest rates. Given Japanese investors' substantial holdings of trillions of dollars in overseas debt, its potential exit from prolonged easing measures could significantly impact global bond markets.