Bank of Japan Governor Kazuo Ueda highlighted the benefits of higher interest rates in normal economic conditions as he spoke at his last scheduled public speech this year in a conference organized by Keidanren's business lobby in Tokyo on Monday.
According to Ueda, a slightly positive inflation rate offers the most apparent advantage since it provides more space for monetary policy responses to an economic downturn.
"I believe that greater economic stability as a result of securing room for monetary policy responses will have a significant positive effect on firms as they formulate their business plans," the governor said.
Apart from discussing these benefits, Ueda also mentioned the central bank will maintain patient monetary easing to achieve stable inflation in the country.
The central bank maintained a negative 0.1 percent at the recent policy meeting to increase lending by banks and encourage businesses and consumers to borrow more. Approximately two-thirds of economists anticipate the initial rate hike since 2007 to occur by April, while around 15 percent predict the possibility of this happening next month.
However, Ueda has not mentioned the exact timeframe for the policy change due to economic and market development uncertainties.
While Ueda refrained from dropping a clear hint on the timing, he joins his deputy Ryozo Himino in highlighting some benefits in a world without negative rates, including an improvement in net interest income.
Ueda said that while businesses are increasingly considering raising wages and prices, the critical factor revolves around the continuity of wage growth next year. The initial result of the wage talks will be released in March.
This was also why he remained cautious about raising rates in the meeting, citing that the disparity between wage growth and escalating prices might not be able to sustain the central bank's two percent inflation target level.
Japan's long-term low inflation and stagnant wages have made people believe prices and wages will stay low. Ueda believes that changing this view, along with making wages and prices rise, would be beneficial. For example, it could lead to better job distribution.
However, Mizuho Securities economists Yasunari Ueno and Shintaro Inagaki said in a research note that the BoJ needs to take a "leap of faith" in altering policy, even if some economic signals remain uncertain, as real-world economic data are always going to be mixed.
Mixed response
Following Ueda's statement, Japanese government bond yields saw a slight increase on Tuesday, with a lukewarm response to a two-year notes auction. The increase was also affected by anticipations of the BoJ moving away from the negative short-term interest rate policy next year.
At 04:30 GMT, the 10-year JGB yield rose by 1.5 basis points to 0.625 percent. In contrast, benchmark 10-year JGB futures recorded a decline of 0.15, standing at 146.46.
The two-year JGB yield remained unchanged at 0.035 percent. However, it hadn't been traded following the finance ministry's announcement of the auction results. The results indicated a widening tail — measured by subtracting the lowest price from the average price — increasing from 0.012 yen to 0.021 yen compared to the previous month. Meanwhile, the five-year JGB yield climbed by one basis point to reach 0.240 percent.
In the superlong sector, the 20-year yield increased by two basis points, reaching 1.370 percent, while the 30-year yield saw a rise of 1.5 basis points, reaching 1.595 percent.
The market now anticipates the upcoming BOJ policy meeting scheduled for January 22-23, as it is looking for additional announcements on rate policy shifts.