MNI INTERVIEW: March Action Chance Rises - Ex-BOJ Sakurai

Recent Bank of Japan communications and results from spring wage negotiations have increased the chance of policy adjustment at the upcoming March 18-19 meeting, a former BOJ board member told MNI.

“The BOJ stands ready to exit from easy policy anytime,” noted Makoto Sakurai in an interview, pointing to a recent speech by Deputy Governor Shinichi Uchida and recent releases, such as the January meeting’s summary of opinions. “Everything is all arranged and a final decision depends on Governor (Kazuo) Ueda’s determination.”

Uchida noted on Feb 8 the BOJ would not raise rates rapidly should it exit negative rates, noting the bank would achieve its 2% target in a “desirable manner accompanied by wage increases." (See MNI: High Uncertainty, Despite 2% Strengthening - BOJ Uchida) Spring wage negotiations are currently underway, however, a number of unions have released results, while the country's largest trade union Rengo will publish its first tally of pay deals on March 15.

Sakurai noted the BOJ had previously signalled imminent and important policy changes via deputy governor speeches. Uchida’s speech illustrated the BOJ’s seriousness towards policy change predicated on hefty wage hikes at major and smaller firms aimed at securing necessary workers, Sakurai said. Wage hikes will filter through to services prices – an important factor for bank officials, he added.

MNI reported last week Bank officials have struggled to measure the so called secondary force of inflation, or the relationship between wages and prices. (See MNI POLICY: BOJ April Action Will Hinge On CPI Result)

Sakurai noted the BOJ will likely raise the policy interest rate to 0.50% after exiting negative rates, however, the pace will depend on economic development and inflation.

The BOJ has held the short-term interest rate, emblematic of Japan’s easy policy settings, at -0.10% since 2016. Sakurai told MNI in November the BOJ was likely reviewing its three-tier system of interest on bank reserves, potentially opening the way to an exit from negative overnight rates.

NEUTRAL-RATE PREDICTIONS

Sakurai estimated the nominal neutral interest rate was about 3%, judging from a 2% inflation rate and 1% real neutral interest rate, which is close to Japan’s potential growth rate of between 0.5-1.0%.

“It is natural for the long-term interest rate to rise to 3% on a nominal basis but the BOJ will not tolerate the rate to rise to 3% as the bank has pledged to maintain accommodative financial conditions,” Sakurai argued.

He added the level of the long-term interest rate would rise to 2% at the highest, largely consistent with the Ministry of Finance’s 1.9% fiscal 2024 interest payment rate prediction, which it increased from 1.1% late last year. The BOJ will also continue to buy Japanese government bonds to prevent the long-term interest rate from rising above 1%, although the scale of the programme will fall, he added.

The policy interest rate may rise faster than the long-term interest rate, which the BOJ will suppress to help support financial conditions at commercial banks and government borrowing, he noted.