Unfazed by recession, BOJ keeps April policy shift on table
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[February 16, 2024] By
Leika Kihara
TOKYO (Reuters) - The Bank of Japan is on track to end negative interest
rates in coming months despite the economy's fall into recession, say
sources familiar with its thinking, though weak domestic demand means
they may seek more clues on wages growth before acting.
Japan shocked analysts on Thursday when data showed gross domestic
product unexpectedly contracting for two straight quarters, the
technical definition of a recession, and losing its place as the world's
third-largest economy to Germany.
While the GDP headlines were startling, the focus for BOJ policymakers
is on whether the bumper wage hikes set for 2024 will be repeated next
year, a condition the central bank believes is necessary for Japan to
emerge from decades of tepid household consumption.
For that reason, this spring's annual wage negotiations that set pay
levels for 2025 remain a more important economic indicator for the BOJ
than the fourth-quarter GDP, which is backward looking.
At the same time, the consumer-sector weakness seen in the GDP figures
means an end to negative rates is now more likely at the BOJ's April
meeting rather than its March gathering, giving the bank more time to
get a read on the health of the economy.
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"It's true domestic demand lacks momentum. But GDP is only among many
data points the BOJ looks at," said one source. "What's important is the
economy's broader trend and the outlook," another source said, a view
echoed by third source.
BOJ governor Kazuo Ueda, who took office last year, has been laying the
groundwork to shift away from the radical monetary stimulus introduced
by his predecessor Haruhiko Kuroda, which has been blamed for heavy
financial market distortions.
On Friday, Ueda stuck to the script that tweaks to various monetary
easing measures, including negative rates, were still options despite
the GDP data.
DELAY NOT WITHOUT RISK
Intensifying labor shortages have prodded many firms to signal
significant pay hikes, heightening hopes of broad-based wage gains that
would give households purchasing power to weather steady price rises.
The BOJ hopes higher wages and weakening cost-push pressure will
underpin consumption and the broader economy, thereby keeping inflation
sustainably around its 2% target and allowing it to normalize monetary
policy.
Last week, Deputy Governor Shinichi Uchida explained in depth the BOJ's
plan for dismantling its complex policies, which included a pledge to
avoid hiking borrowing costs rapidly upon ending negative rates.
The carefully telegraphed signals have led most market players to
project an end to negative rates either at the BOJ's policy meeting on
March 18-19 or April 25-26. A Reuters poll conducted after the release
of GDP data showed all 10 economists predicting an end to negative rates
by April.
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People walk in front of the Bank of Japan building in Tokyo, Japan
January 23, 2024. REUTERS/Kim Kyung-Hoon/File Photo
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Delaying an exit from negative rates could accelerate the yen's
recent declines, hurting already soft consumption by pushing up
import costs.
"Markets are already fully pricing in the chance of action either in
March or April," a fourth source said. "If the BOJ forgoes action,
that could be a huge shock to markets."
While sticking to its plan for a near-term exit, the BOJ may prefer
to act in April rather than March to gauge more data given
uncertainty over the economic outlook.
Some analysts expect the economy to contract again in the current
quarter due to sluggish consumption and delays in capital
expenditure caused by labor shortages.
Key data points BOJ policymakers will likely look at ahead of their
March meeting include the conclusion of big firms' wage negotiations
with unions on March 15.
Revised October-December GDP data, due on March 11, may also be
important given the large revisions seen in past releases,
especially around capital expenditure, which could sway the view on
the economy.
Waiting until the April meeting will allow policymakers to
scrutinize the BOJ's quarterly "tankan" survey, due on April 1, for
clues on whether companies are maintaining their upbeat capital
expenditure plans.
"If the tankan underscores the resilience of capital expenditure,
that could offset the weak GDP outcome," said Naomi Muguruma, chief
bond strategist at Mitsubishi UFJ Morgan Stanley Securities, who
predicts an end to negative rates in April.
The BOJ's quarterly regional branch managers meeting, to be held in
mid-April, will also give board members a fresh glimpse of whether
wage hikes are broadening nationwide.
Mindful of the need to appease politicians worried about the risk of
a deeper recession, the BOJ will likely keep signaling an end to
negative rates won't be followed by the kind of aggressive rate
hikes seen in the United States, analysts say.
"The BOJ will probably keep explaining that ending negative rate
isn't tantamount to monetary tightening," said Koichi Fujishiro,
chief economist at Dai-ichi Life Research Institute.
(Reporting by Leika Kihara; Additional reporting by Tetsushi
Kajimoto, Takahiko Wada, Kentaro Sugiyama and Yoshifumi Takemoto;
Editing by Sam Holmes)
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