HomeEconomic IndicatorUnfazed by economic downturn, BOJ maintains plan for April policy change.

Unfazed by economic downturn, BOJ maintains plan for April policy change.

Bank of Japan Set to End Negative Interest Rates Despite Recession

Bank of Japan’s Plan

The Bank of Japan (BOJ) is planning to end negative interest rates in the coming months despite the country’s recent fall into recession. Sources familiar with the BOJ’s thinking have revealed that the central bank intends to make this move. However, it may seek more clues on wages growth before taking any action due to weak domestic demand.

Impact of Recession

Japan’s GDP data showed unexpected contraction for two consecutive quarters, officially pushing the country into a recession. This has led to Japan losing its place as the world’s third-largest economy to Germany. Although these figures are concerning, the BOJ is more focused on the annual wage negotiations set for 2024 and the potential wage hikes for the following year, as these are crucial indicators for the bank.

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Policy Shift Timeline

Despite the recent recession, the BOJ is now more likely to end negative rates at its April meeting instead of its March gathering. This decision allows the bank more time to assess the state of the economy. Governor Kazuo Ueda has been preparing to move away from the radical monetary stimulus introduced by his predecessor, and this shift is still on track despite the recent GDP data.

Market Reaction and Economic Outlook

Delaying an exit from negative rates could lead to further declines in the yen’s value, impacting consumption by increasing import costs. Market players are already factoring in the possibility of action from the BOJ in March or April, and any deviation from this expectation could cause significant market shock. While the BOJ plans for a near-term exit, the bank may prefer to wait until April to gather more data and assess the economic outlook.

Future Considerations

The conclusion of big firms’ wage negotiations with unions on March 13 and the revised October-December GDP data, due on March 11, will be essential data points for the BOJ ahead of its March meeting. Waiting until the April meeting will allow policymakers to scrutinize the BOJ’s quarterly “tankan” survey, due on April 1, and the bank’s quarterly regional branch managers meeting in mid-April.

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Post-Negative Rate Scenario

The BOJ is expected to keep explaining that ending negative rates does not equate to monetary tightening, aiming to reassure politicians and stakeholders. The bank is keen on preventing aggressive rate hikes akin to those seen in the United States to mitigate the risk of a deeper recession.

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