MNI WATCH: BOJ Nears Negative Rates Exit After Wages Survey

The Bank of Japan is nearing an exit from extremely easy monetary policy at its March 18-19 meeting after a closely-watched union survey showed hefty pay hikes, raising the chances of achieving the 2% inflation target.

While officials will consider a range of policy options, the Rengo wages survey results tilt the likely outcome towards raising the overnight rate from negative levels while also scrapping the 1% ceiling on 10-year bonds. Mindful of the risk of a yield spike, the BOJ could indicate that it will continue to cap yields, though without revealing a specific level. It is likely to shift to flexible purchases of JGBs and to keep its total stock of bonds little changed.

As it moves away from negative rates, the BOJ could adopt a two-tier system for required reserves. Its current tiering system, introduced in January 2016 together with negative rate policy, charges -0.1% on excess reserves, as well as paying zero and a positive rate on the other two tiers. Under a new arrangement, financial institutions, mainly banks, would receive a positive rate on excess reserves but only at certain times during the maintenance period, with the BOJ able to adjust these times. (See MNI POLICY: BOJ Looks At Two Tiers For Required Reserves)

However, officials are concerned that paying interest rates on some required reserves would be unfair for financial institutions such as investment trusts and insurance firms which do not have such reserves, and are considering measures to compensate them.

RENGO SURVEY

The survey by Trade Union Confederation Rengo showed an average wage hike of 5.28% by large firms this year, up from 3.80% a year before and the highest level since 1991. Medium-sized firms raised wages by 4.42%.

This data is likely to be strong enough to win over those BOJ members who had been hesitant to move away from negative rates. While the survey results don’t include smaller firms, they are likely to be forced to follow the lead of bigger companies.

Japan’s gross domestic product for the October-December period posted the first growth in two quarters as capital investment was revised up, also supporting the policy changes.

While the BOJ is expected to lower its assessments of private consumption and industrial production in the wake of recent weak data, these should not impede the move away from negative rates, as officials will focus more on the outlook.