BOJ Policymaker Suggests Potential Policy Adjustment Early Next Year, According to Reuters

By Leika Kihara

KUSHIRO, Japan – Japan’s inflation is now "clearly in sight" of the central bank’s target, signaling a potential end to negative interest rates early next year, according to Bank of Japan (BOJ) board member Naoki Tamura.

Tamura’s statements are the strongest indication from a BOJ policymaker that increasing inflation and wages may prompt the bank to consider significant changes to its expansive stimulus measures. During a speech to business leaders, Tamura noted that nearly a decade has passed since the BOJ began efforts to achieve a sustainable 2% inflation target, and he expressed confidence that this goal is now achievable.

At present, the BOJ is committed to maintaining monetary easing to closely monitor developments in wages and prices. Tamura expressed hope that by January to March next year, the bank will have clearer data to assess whether Japan can consistently meet its inflation target.

Even though inflation currently exceeds the 2% mark, the BOJ has committed to keeping ultra-low interest rates until there is convincing evidence that this level can be sustained. Tamura emphasized the importance of timely action, stating that the pace and sequence of policy normalization will depend on overall economic conditions.

He mentioned that eliminating negative interest rates would be one of the options if the BOJ were to normalize its policy. However, even if negative rates are abolished, monetary easing would continue as long as interest rates remain low.

Following Tamura’s remarks, Japanese government bond (JGB) yields rose, as investors perceived his comments as less dovish than those of BOJ Governor Kazuo Ueda, who indicated last week that Japan’s core inflation is still somewhat below the target.

Tamura is viewed as a hawkish member within the BOJ’s nine-member board, and his comments suggest that discussions regarding the timing for scaling back the bank’s unconventional stimulus will escalate in the upcoming months. Conversely, Deputy Governor Shinichi Uchida recently stated that there is still considerable distance before the BOJ can abandon negative interest rates.

Under the bank’s yield curve control (YCC) policy, short-term interest rates are maintained at -0.1%, with long-term yields targeted around 0% to help achieve the 2% inflation goal sustainably. Recent efforts by the BOJ to allow long-term rates to rise in response to higher inflation have drawn criticism for distorting market pricing and causing undesirable declines in the yen.

Markets do not have a consensus on when the BOJ might adjust or eliminate the YCC policy. Analysts surveyed expect any scaling back of stimulus to begin no earlier than a year from now.

Japan’s core consumer inflation remained above the central bank’s 2% target in July for the sixteenth consecutive month, as companies continued to pass on increased import costs to consumers. Governor Ueda has stressed the necessity of maintaining an ultra-loose policy until inflation is genuinely driven by strong domestic demand supported by sustained wage growth.