BOJ Watchers Bring Forward Rate Hike Forecasts on Ueda’s Remarks

Bank of Japan watchers moved forward their forecasts for an end to negative interest rates after Governor Kazuo Ueda touched on that possibility in an interview published over the weekend.

(Bloomberg) — Bank of Japan watchers moved forward their forecasts for an end to negative interest rates after Governor Kazuo Ueda touched on that possibility in an interview published over the weekend.

All 46 economists surveyed by Bloomberg over the past week said the BOJ will stand pat on policy at next week’s board meeting, with half expecting authorities to abandon the subzero rate by the end of June. 

Last month, 31% predicted a rate hike within that time frame. Some 9% of respondents in the latest survey see the BOJ adjusting or discarding its yield curve control mechanism in October. 

Most economists say regardless of timing, the next change for YCC will be its scrapping after the bank essentially widened its ceiling for 10-year yields to around 1% in July.

“There is a chance of an early policy shift,” said Hiroshi Namioka, chief strategist at T&D Asset Management Co. “Every policy meeting has become live since Ueda took the helm.”

For the full results, click here.

The change in rate expectations comes with core inflation still above the BOJ’s target level after 16 months and the yen not far from a three-decade low, raising the prospects of further price rises fueled by elevated import costs. 

The survey’s findings suggest economists are more cautious in their forecasts than traders in the bond market. As of Tuesday, overnight-indexed swaps indicated the central bank would exit negative rates in January, based on data compiled by Bloomberg. After the July policy meeting market pricing suggested an exit in September 2024.

In his remarks to the Yomiuri newspaper, Ueda maintained that the BOJ would keep its easy policy for now. But he also said it’s possible the BOJ will have enough information by year-end to gauge if wages will continue to rise — a key factor in deciding whether to pare back its super-easy policy. Ueda said raising the short-term interest rate was among the options for doing that. His comments pushed bond yields to a nine-year high and gave the yen a temporary boost.

The poll indicated expectations are building for next year’s annual spring wage negotiations. Some 80% of respondents said wage hikes will spur a change in BOJ policy, up from 59% in June, when the same question was asked. Overall, 65% foresee some manner of policy shift by June.

Rising notions that the BOJ is inching toward tightening come as some of its peers look poised to reverse course. Economists see the European Central Bank conducting one last hike, with views split as to whether that move will come on Thursday. Economists at North America’s largest banks now say the Federal Reserve has finished its tightening cycle and may cut rates by around one percentage point next year.

A change in course overseas might ease pressure on the yen down the line, but for now the currency’s continued weakness has prompted Japanese authorities to warn of potential currency intervention if speculative trading goes too far. While most economists took Ueda’s comments in the Yomiuri interview to be hawkish, many of them also speculated that the governor intended to take some heat off the yen.

“Ueda indicated a chance of ending negative rates probably because he couldn’t ignore the weak yen and the probability of upside risks for inflation that go with it,” said Izuru Kato, chief economist at Totan Research. “The timing of ditching the negative rate will be heavily influenced by foreign exchange rates. I expect December is the earliest case.”

In July, Ueda cited volatility in foreign exchange markets as a factor officials considered in deciding to loosen the bank’s grip on the 10-year yield curve. In the survey, some 62% said the link between monetary policy and the currency has strengthened, while 22% said that wasn’t the case. 

If the yen weakens below 150 per dollar it would trigger intervention, according to the median forecast of the economists in the survey. The dollar was trading just above 147 yen Wednesday morning.

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