The BOJ Could Finally End Negative Rates Tomorrow

There is a lot of anticipation ahead of the BOJ policy meeting to be held early tomorrow (or late tonight, depending on where in the globe you’re located). The yen has strengthened substantially and the Nikkei saw its record high clipped last week. Rampant speculation flew around as analysts dissected a large volume of commentary from officials, but without anything conclusive being offered.

The media now reports (albeit speculatively) that the BOJ is more-or-less evenly split on whether to hike rates at the March or April meeting. Both options have their complications, and the market isn’t pricing in either. Which means that no matter what happens tomorrow, there could be a strong move in the yen.

So, What About March?

The main theme that has driven speculation of a March hike is based on comments from BOJ officials in the last few months, but ratified by Governor Kazuo Ueda himself last week. That is, how the spring wage negotiations go will be pivotal for the timing of when negative rates will end. And since then, wage negotiations have come in at the top of the range, with most companies giving in to union demands for wage growth.

On top of that, inflation figures for February are expected to show a sharp increase in headline and core inflation. The data won’t be available to the public until Friday, but it’s likely to be taken into consideration by the BOJ in its policy considerations. The other thing is that the BOJ has a long standing history of trying to “surprise” the market with its move, believing that has a bigger impact. With so much speculation about a rate hike going on already, there is no chance of a “surprise” if the BOJ waits another month.

But, What About April?

The thing is, when taking office, Governor Ueda promised to communicate in advance when negative rates would end. This would be a change in the historic policy of the BOJ, but the increased transparency also has its advantages. So far, he hasn’t explicitly communicated that rates will increase in March. Particularly in the last post-rate decision presser, which is traditionally when central banks foreshadow future rate policy, he gave no indication that rates would rise now.

The question is whether his comments about the need to raise rates at some point, and suggesting that when rates rise, they will do so gradually, can be considered sufficient forward communication to meet Ueda’s standard. Since, after all, he’s the one who set the idea of advance warning. This would be the first policy change that the BOJ will do under his leadership, so there isn’t any history to go by.

What Will the Markets Do?

The other issue is that there are still plenty of data points that the BOJ might want to have before deciding on what would be a major policy shift, given how long rates have been negative. The wage negotiation process for spring isn’t totally over. February (or, indeed, first quarter) inflation and labor data is not officially available yet. Waiting to late April to decide on policy would provide a clearer picture of the Japanese economy.

At the moment, the markets are pricing in a fairly equal chance of a rate hike in either this meeting or the next. Which means that if the BOJ goes through with a hike, it could substantially strengthen the yen. But if it fails to do so, the market will likely expect a rate hike at the next meeting with certainty. That could end up offsetting some of the yen’s weakness that would be expected after the BOJ failed to deliver tightening. Of course there is always the chance of a wildcard, such as another tweak to YCC in an attempt to split the difference between tightening and keeping policy unchanged.

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• Source: https://www.orbex.com/blog/en/2024/03/the-boj-could-finally-end-negative-rates-tomorrow