The Bank of Japan Is Getting Ready To Move
What Happens Next May Not Be Pretty
If the latest news is true, the Bank of Japan is preparing to end negative interest rate policy at its policy meeting next week. It’s been hinted at for months that the BoJ was beginning to take a more hawkish position. Based on comments from Governor Ueda, it sounded like the central bank would be targeting late spring or early summer for its first interest rate increase since 2007. Now, it appears that the BoJ is satisfied with the economy’s progress on inflation, wage growth and GDP that it can finally begin normalizing monetary policy.
GDP Growth
Japan’s economic growth rate hasn’t been stellar, but it’s at least been steady on a year-over-year basis. It’s been much choppier on a quarter-over-quarter basis.
Japanese GDP grew by 1% in both the 1st and 2nd quarters of 2023 but shrank by 0.8% in the 3rd quarter. The avoidance of a technical recession in Q4 was a positive sign, but the degree of volatility on a short-term basis makes it difficult to discern what the longer-term trend is.
The BoJ is probably satisfied at this point that the economy can withstand at least slightly tighter conditions and doesn’t need a mountain of liquidity to remain out of recession. The central bank is already likely to take this one move at a time and could very well pause between hikes (assuming there is more than one hike for now). GDP may not warrant an aggressive hiking cycle, but it doesn’t warrant negative interest rates either.
Wage Growth
This is the big one that the BoJ wanted to see progress on. Real wages have been lagging for a while and the BoJ was rightfully concerned that a lack of spending power from consumers might slip the economy back into recession. This week served to calm a lot of those fears when the shunto spring wage negotiations yielded a 4% pay raise for Japanese workers, the largest such annual increase in more than 30 years.
Keep reading with a 7-day free trial
Subscribe to The Lead-Lag Report to keep reading this post and get 7 days of free access to the full post archives.