Former Bank of Japan Board Member Predicts Exit from Negative Interest Rate Regime
Japan’s central bank, the Bank of Japan (BOJ), is expected to make a significant policy change this spring by exiting its negative interest rate regime. However, despite this move, the sluggish growth of the Japanese economy will continue to limit the bank’s ability to alleviate depreciation pressure on the yen. This prediction comes from a former BOJ board member, Sayuri Shirai, who believes that the central bank is concerned about the side effects of negative interest rates and will take steps to address them.
The BOJ’s Governor, Kazuo Ueda, is facing a challenging situation. On one hand, he needs to stem the depreciation of the yen, which has been driven by the divergence between high U.S. interest rates and Japan’s ultra-easy monetary policy. On the other hand, the BOJ is constrained by high inflation rates that policymakers still consider unsustainable. This inflation has also led to a decrease in domestic demand and pushed the Japanese economy into a technical recession, causing it to fall behind Germany and become the world’s fourth-largest economy.
Shirai, an economics professor at Keio University in Tokyo and former BOJ policy board member, believes that the central bank will make some policy changes this spring, including the removal of negative interest rates. She argues that the BOJ is concerned about the side effects of these rates and wants to take this opportunity to make adjustments. Market participants also anticipate that the BOJ will normalize its policies this spring, regardless of whether it can achieve a stable 2% inflation rate.
The depreciation of the yen has not only affected the purchasing power of consumers in Japan but has also reduced the value of the country’s exports. The recent U.S. inflation data, which came in higher than expected, caused the yen to retreat to around 150 to the dollar. This dashed hopes of a quicker rate cut by the U.S. Federal Reserve and further highlighted the chronic weakness of the yen.
The prolonged high inflation rates in Japan have had a negative impact on domestic consumption, which is a key factor contributing to the consecutive contractions in the country’s GDP. While inflation has been gradually slowing down, “core core inflation,” which excludes food and energy prices, has exceeded the BOJ’s 2% target for over a year.
At its January meeting, the BOJ decided to keep short-term interest rates at -0.1% and maintain its yield curve control policy, which sets the upper limit for 10-year Japanese government bond yields at 1%. The central bank has been cautious and meticulous in its efforts to reflate an economy that has been plagued by deflationary pressures for decades.
Many market participants expect the BOJ to move away from its negative interest rate regime at its April policy meeting, especially if the annual spring wage negotiations confirm a trend of meaningful wage increases. The central bank believes that higher wages would lead to increased consumer spending. However, Shirai points out that currently, both Japanese yen-denominated wages and household consumption are declining. This makes it difficult for the BOJ to normalize its policies, even if inflation remains above 2% for some time.
Shirai also highlights the challenge of raising interest rates due to the interest rate differential between Japan and other countries, which creates significant depreciation pressure on the yen. She explains that even if the BOJ were to raise interest rates slightly, they would not be able to continue doing so because of the weak state of the economy. Therefore, any normalization of policies would likely involve the removal of negative interest rates, which may not have a significant impact on the depreciation of the yen.
In conclusion, the former BOJ board member predicts that the central bank will exit its negative interest rate regime this spring. However, due to sluggish economic growth and other challenges, the BOJ’s ability to alleviate depreciation pressure on the yen will be limited. The central bank is caught between a rock and a hard place, balancing the need to stem yen depreciation and address high inflation rates. The outcome of these policy changes will have significant implications for Japan’s economy and its position in the global market.
