Bank of Japan leaning toward exiting negative rates

A growing number of Bank of Japan policymakers are warming to the idea of ending negative interest rates this month on expectations of hefty pay hikes in this year's annual wage negotiations, four sources familiar with its thinking said. Upon ending negative rates, the central bank is also likely to overhaul its massive stimulus programme that consists of a bond yield control and purchases of riskier assets, they said.

But an imminent shift is a close call as there is no consensus within the nine-member board on whether to pull the trigger at its upcoming March 18-19 meeting, or hold off at least until the subsequent meeting on April 2526, they say. Many BOJ policymakers are closely watching the outcome of big firms' annual wage negotiations with unions on March 13, and the first survey results to be released by labour umbrella Rengo on March 15, to determine how soon to phase out their massive stimulus.

Significant pay hikes will likely heighten the chance of action in March, as the offers by big firms usually set the tone for those by smaller firms nationwide, the sources said on condition of anonymity due to the sensitivity of the matter. The BOJ hopes that solid wage increases will coax consumers to spend more, boosting demand and prices after years of economic stagnation and deflation.

"If the spring wage negotiation outcome is strong, the BOJ may not necessarily need to wait until April," one of the sources said, a view echoed by another source. But the BOJ may hold off until April if many board members prefer to wait for next month's "tankan" business sentiment survey and the bank's regional branch managers' report on the nationwide wage outlook, before making a final decision, they said.

The yen has been rising against the dollar on growing speculation that the BOJ could end negative rates soon, and bets of imminent rate cuts by the US Federal Reserve. It rose to 146.95 to the dollar on Friday, its highest level since early February.

The BOJ has long targeted inflation at 2 percent and has guided short-term rates at -0.1 percent and the 10-year bond yield around 0 percent under a policy dubbed yield curve control (YCC). With inflation exceeding the target for well over a year and prospects for sustained wage gains heightening, many market players expect the central bank to end its negative interest rate policy this month or in April. Upon pulling short-term rates out of negative territory, the central bank is likely to ditch its 10-year bond yield target, the sources said.

To avoid an abrupt spike in long-term rates, the BOJ will likely commit to intervening in the market when needed to stem sharp rises, or offer guidance on the amount of government bonds it will keep buying, they said. Japan's Jiji news agency reported on Friday the BOJ is considering replacing YCC with a new quantitative framework that will show in advance how much bonds it will buy in the future.

Prospects of continued solid wage growth, driven by rising living costs and an intensifying labour shortage, have heightened momentum for an end to negative rates in March. Japan's largest trade union group Rengo said on Thursday average wage hike demands hit 5.85 percent for this year, topping 5 percent for the first time in 30 years.

BOJ board member Naoki Tamura, a former commercial bank executive, has been the most vocal advocate of an early exit from negative rates, signalling in August last year that the bank could take such action by March 2024. Fellow board member Hajime Takata also called for an overhaul of the BOJ's stimulus programme last week, saying that Japan was finally seeing prospects for durably achieving the bank's inflation target.