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Monetary Milestone: Japan's Tactical Delay in Interest Rate Hikes Until Autumn


Leo Gonzalez

April 3, 2024 - 21:46 pm


Bank of Japan May Hold Off on Rate Hikes Until Autumn: Insights from Former BOJ Official

The Bank of Japan headquarters in Tokyo

The Bank of Japan (BOJ) is poised on the cusp of a significant policy shift after its recent move away from a prolonged era of monetary stimulus. Yet, a pivotal development in Japan's economic management may only unfold this autumn. Former BOJ policy board member Makoto Sakurai hinted in a recent conversation that the bank's next interest rate decision would likely be deliberated upon during the October policy meeting, after having skillfully navigated the complex endeavor of scaling back its expansive stimulus strategy.

"There must be a tremendous sense of achievement inside the BOJ," Sakurai remarked. "They conquered the mountain and there are no big urgent issues left now."

BOJ's Measured Approach to Rate Increases

Governor Kazuo Ueda, along with the rest of the board, may bide their time for the remainder of the year to better assess whether Japan's economy has the fortitude to sustain further rate hikes. Sakurai, who maintains regular communication with current BOJ officials, predicts the commencement of a cautious policy normalization process starting next year. He forecasts marginal, semi-annual rate increases of about 25 basis points, should economic conditions permit.

“Any move this autumn is like a jab. No bold action,” described Sakurai, who recalled that the BOJ had already geared up for a rate increase as early as January. “A clear transition to normalization will follow in fiscal 2025, assuming the economy continues to thrive.”

BOJ and Currency Market Watchers: A Difference in Expectation

Interestingly, Sakurai's perspective conflicts with some BOJ analysts who anticipate that the bank may expedite its actions to minimize the disparity in interest rates between Japan and the United States. This assumption is fueled by the yen's plummet to a historic 34-year trough against the dollar last week, a phenomenon that makes a quicker response seem credible.

However, Sakurai contends that with the likelihood of further U.S. rate hikes appearing slim, the focal point should shift to Japan’s government currency authorities, especially if the yen descends beyond the 160 threshold against the dollar.

“July seems a bit too early,” Sakurai stated, reinforcing his view that foreign exchange rates won't likely be the decisive factor in steering monetary policy.

Interest Rate Differentials and U.S. Federal Reserve Stance

Although the gap in interest rates may persist longer than anticipated, there's still an expectation that it will constrict later in the year. Comments from two voting members of the U.S. Federal Reserve suggested that while the institution is not hastily transitioning to a rate-cutting cycle, the possibility of three rate reductions in 2024 remains plausible.

BOJ Leadership and Currency Manoeuvres

Governor Ueda, a respected former academic, has exercised considerable prudence when addressing currency matters, thereby signifying his preference to generally avoid the subject. This stance is a noticeable divergence from his predecessor, Haruhiko Kuroda, who was more forthright in his commentary on currencies. Kuroda went so far as to recognize that a depreciating yen generally favors the overall economy.

In rare occurrences when touching upon the subject of currencies, Ueda has employed a balanced viewpoint, acknowledging the conceivable benefits and drawbacks following the yen’s devaluation.

An Extraordinary Stimulus Reversal

On a monumental day for monetary policy in Japan, March 19 marked the BOJ's abrupt reversal from the world's last remaining extraordinary economic stimulus measures. In a bold stride, the negative rate policy was abandoned, the yield curve control mechanism shelved, and mandates for purchasing exchange-traded funds ceased. Amidst the historic shift, Ueda remained undisturbed. When prompted to comment on his sentiments during a post-meeting press conference, Ueda simply indicated that the bank's decision was a suitable response to the current economic and price conditions.

Refusing to adhere to a piecemeal rollback, the BOJ under Ueda's leadership manifested its resolve to leap at any favorable opportunity to enact meaningful change when circumstances allow.

Future Focal Points for BOJ: Wages and Inflation

In the foreseeable future, the prevailing emphasis for the BOJ will be to affirm the strengthening of a virtuous cycle connecting wages with inflation. The central bank will place particular scrutiny on salary increases throughout smaller businesses and monitor the robustness of the economy via indicators such as gross domestic product (GDP).

"The BOJ has taken care of the biggest problems," Sakurai noted. "They will probably have some quiet time in terms of policy actions."

The insights provided by Makoto Sakurai, keenly illustrate the strategic planning and considered pace at which the BOJ is approaching its future monetary policy. Navigating away from nearly a decade of robust economic stimulus measures, the bank signals a gradual and deliberative return to regular monetary policies, taking into account the overall economic health and the underlying strength of the yen. While discrepancies in global interest rates pose challenges, the BOJ appears committed to a path that ensures long-term stability and growth for Japan's economy.

©2024 Bloomberg L.P. You can continue reading about this topic by following the link to Bloomberg's site: Bloomberg Article on BOJ’s Policy Outlook.