Former Governor of the Bank of Japan, Eiji Maeda, stated that if the Japanese economy can withstand the risks posed by overseas uncertainty, the Bank of Japan may end its negative interest rate policy as early as January next year and continue to raise interest rates thereafter.
Last month, the Bank of Japan raised its price forecast: the bank expects to achieve an annual core CPI rate of 1.9% in both fiscal years 2024 and 2025, excluding fresh food and energy. Compared to this, in July, these two numbers were 1.7% and 1.8%, respectively.
In response, the former central bank governor believes that this "unexpected and significant" increase means that the inflation rate is expected to continue to reach the central bank's target of 2%. He stated that the bank may raise its price forecast again in January next year, providing a basis for short-term interest rates to break away from negative values.
In 2016, the Bank of Japan lowered its benchmark interest rate, the short-term interest rate, from below zero to a historical low of -0.1% and has continued to this day. Maeda stated that if the central bank determines that the upward pressure on inflation is still increasing, they may end negative interest rates as early as January next year.
Bank of Japan short-term interest rate
The Bank of Japan has previously relaxed its "Yield Curve Control" (YCC) plan multiple times, taking a small step towards exiting the large-scale monetary stimulus policies of the past decade. However, compared to ending YCC, exiting negative interest rates is more important as this marks a shift towards a more neutral policy stance by the bank.
Maeda, who maintains close contact with policy makers, said that when deciding to end the negative interest rate policy, the Bank of Japan was bound to believe that inflation could stabilize around 2%.
After raising short-term interest rates from negative to zero, they may continue to gradually increase interest rates at a rate of several months, while closely monitoring the development of the economy and prices. The ultimate short-term interest rate will be raised to a level that neither stimulates nor cools the economy.
Maeda Rongzhi said that the Bank of Japan may also end YCC, "during which they will develop a guideline that promises to continue to flexibly purchase government bonds to cope with potential long-term interest rate hikes
Last week, Sameer Goel, head of Asia Pacific research at Deutsche Bank, told the media that he believed the Bank of Japan would "definitely" lift negative interest rates and predicted that the bank would take policy action in January 2024. Looking ahead to next year, the Bank of Japan will hold interest rate meetings in January, March, and April.
