Last week, Bank of Japan Governor Kazuo Ueda said that a country with a price of **2% is actually experiencing inflation, which sounds obvious, but it is not. This wording suggests that the world's last remaining experiment in negative interest rates is coming to an end.
In a way, this is not the best time for Japan to lay the groundwork for a historic policy shift. The economy is in recession, and inflation is coming back down smoothly after a post-pandemic peak. They don't react like textbooks; They seem determined to raise interest rates in the coming months, which is commonplace in most economies but rare in Japan.
The BoJ sounds like an institution that is openly pre-selling rate hikes, and the rate hikes have largely been resolved internally. It's not that strong economic data is needed to encourage Ueda to reform; It's about whether the numbers are disappointing enough to stop this step. Recent data does not appear to have reached the latter threshold. How the BOJ handles this nominally small but symbolic shift – from less than zero to near zero – may determine Ueda's leadership. A smooth transition will earn him a round of applause. If there is more instability, it will be questioned whether Japan can adopt a monetary policy stance that is slightly similar to that of the other members of the G7.
In 2000, Kazuo Ueda was almost the only one on the Bank of Japan's interest rate-setting committee who wanted to wait before raising the benchmark interest rate. His views on the state of the economy are no different from those of his less ** colleagues; After 10 years of hard work, things are starting to look up. He just isn't as convinced as he used to be that the time has come to ditch zero borrowing costs. Wait a little longer, he persuaded, but to no avail. In retrospect, Kazuo Ueda did well, as the economic slowdown at the time quickly led to an embarrassing 180-degree turn.
On Thursday, when asked in Parliament whether Japan was experiencing inflation or more pernicious deflation, Ueda said it was the former. "We expect this trend to continue as it did last year, so in that sense, we are in inflation, not deflation. He had left the microphone near the end of his speech. Minutes after the Nikkei 225 broke through its all-time high, many in the market initially ignored the comment.
On one level, the rhetoric is unremarkable, given that the pace of consumers*** has been at or above the BOJ's 2% target since April 2022. Data released on Tuesday showed that inflation was just below target. This was enough for investors to push the yield on two-year** bonds to their highest level since 2011.
The point is that policymakers have been reluctant to declare that deflation – or the risk of deflation – is over. Less than four months ago, Japanese Prime Minister Fumio Kishida announced "comprehensive economic measures to get rid of this scourge once and for all." Both Japan** and the Bank of Japan have generally said that the Japanese economy is in a state where "it can no longer be called deflationary". It is curious that the ministers have not yet celebrated the victory.
It seems that the fight against "inflation" has affected a generation so much that waving goodbye is as painful as coping with a long stay. This makes Kazuo Ueda's assertion that inflation has arrived a big deal. In the same appearance before MPs, he spoke of a "virtuous circle" in which inflation and wages** complement each other.
It's easier to advertise a rate hike because it's a completely different move than what happened in the US, the eurozone, the UK, Australia, South Korea or India. Japan stressed that its policy would be accommodative, described from minus 01% to zero or slightly above zero, which is an understatement. Bank of Japan Deputy Governor Shinichi Uchida noted in a recent speech that the market expects the Bank of Japan to raise interest rates by 50 basis points within two years. He was careful not to support the bets, but he also didn't say they were wrong.
The Bank of Japan does place a high value on the current wage negotiations between employers and unions. The question everyone is asking is whether the expected pay increases represent a permanent change, especially in the face of a shrinking workforce, or simply an anomaly to compensate for inflation, which is already cooling rapidly.
With stock indices becoming the latest product to emerge from the bubble era and its aftermath, it's easy to get too optimistic. But Kazuo Ueda's opportunities may not last long. The arrival of a recession begs the question: what does the Bank of Japan hope to achieve by tightening policy? There is no risk that the Japanese economy will overheat, and if it were not for technical reasons, inflation in January would actually be below the BOJ's target. The technical reason is that the cost of traveling abroad is 63%. Kazuo Ueda objected in 2000, arguing that the time was premature for a rate hike, and it proved to be the right one. He was in a hurry this time.
The BOJ governor may simply want to end negative interest rates, a very unpopular position inherited from Haruhiko Kuroda. Kazuo Ueda has taken significant steps to get rid of control of the yield curve, another totem of his predecessor's era. If his goal is to get rid of these burdens and see what happens, Kazuo Ueda is almost there. Few zeros (interest rates) are so desirable.