Bank of Japan's Positive Pivot: Negative Interest Rates Out by January

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Former central bank executive Eiji Maeda announced that the Bank of Japan might end its negative interest rate policy as early as January and continue raising short-term borrowing costs, contingent on the economy's resilience amid global uncertainty.

Just a month ago, the Bank of Japan revised its forecasts, anticipating inflation to reach 1.9% in fiscal 2024 and 2025, signaling that inflation is progressing toward sustainably meeting the 2% target, according to Maeda.

He speculates that in January, the central bank might revise its price forecasts, providing a basis for lifting short-term interest rates from the negative zone.

Additionally, Maeda claims that the Bank of Japan could cease managing yields and instead employ a policy of actively purchasing government bonds to counteract the increase in long-term rates.

As part of efforts to control rising prices, the Bank of Japan has set a 0% yield target for 10-year yield curve controlled (YCC) bonds and charges a fee on excess reserves to maintain short-term rates at -0.1% under its negative rates policy.

The Bank of Japan has committed to sustaining these policies until it's evident that the 2% inflation target has been achieved.

If the Bank of Japan opts to abandon negative rates, it would signify that Japan's inflation has stabilized around 2%, requiring the adjustment of short-term borrowing costs to levels that neither stimulate nor slow the economy, Maeda suggests.

Neutral interest rates, accounting for inflation expectations and economic developments, are estimated to be around 2%.

According to Maeda, following the shift from negative territory to zero in short-term rates, the Bank of Japan may gradually increase interest rates at intervals of several months, while closely monitoring economic and price developments. He emphasizes that due to global economic uncertainty, the Bank of Japan will exercise caution even if it continues to raise short-term rates.

Before the introduction of negative rates and YCC in 2016, the Bank of Japan used its QQE (quantitative and qualitative easing) asset purchase program to lower long-term rates.

Maeda anticipates that the Bank of Japan's policy after abandoning negative rates will closely resemble its approach during the QQE period.