Economic Research View
Bank of Japan Ends Negative Interest Rate Policy
Nomura Asset Management Co., Ltd. Published March 19, 2024

Rumi Kurumizawa, CMA
Chief Economist
At the Bank of Japan's monetary policy meeting on March 18-19, a decision was made to begin
the "exit" from its longstanding massive monetary easing policy. This decision aligns with theexpectations of the financial market and the author, as the primary tool of policy will shift fromquantitative and qualitative monetary easing with yield curve controls to short-term interest rates.
The decision includes: 1. Encouraging the uncollateralized overnight call rate to move around 00.1% (providing 0.1% interest on excess reserves), 2. Continuing long-term government bondpurchases at similar amounts as before and taking action with various operations in case ofinterest rate spikes, 3. Ending new purchases of ETFs and J-REITs, 4. Gradually reducing
purchases of commercial paper and corporate bonds with the goal of concluding the practicewithin one year, 5. Removing the overshoot-type commitment regarding the policy of expanding
the monetary base.
The Bank of Japan decides to begin the "exit" within the range of market expectations.
■

Summary of Policy Changes: The Bank of Japan (BOJ) announced the abolition of the frameworkof its longstanding quantitative and qualitative monetary easing policy with yield curve controls andnegative interest rates at today's Policy Board meeting, declaring that these policies have fulfilled theirroles. They introduced a new monetary market adjustment policy, utilizing an interest rate of 0.1% onexcess reserves to "encourage the uncollateralized overnight call rate to move around 0-0.1%". They
plan to continue long-term government bond purchases at a similar amount as before (around 6 trillionyen) and have measures in place to handle any sudden increase in long-term interest rates withadditional purchases or operations if necessary. New purchases of ETFs and J-REITs will bediscontinued, while purchases of commercial paper and corporate bonds will be gradually reduced,
with plans to end purchases in about a year. The overshoot-type commitment was deemed satisfied
and thus removed from the policy statement.

■

Future Policy Management: In the policy statement, under the 2% price stability target, the Bank ofJapan stated that they will exercise monetary policy primarily through the management of short-term
interest rates, based on the perspective of achieving sustainable and stable realization of their target.
Given the current economic and price outlook, they believe that an accommodative monetaryenvironment will continue for the time being and did not strongly suggest future rate hikes ormaintaining interest rates at their current levels, indicating that such decisions will be dependent on
economic fundamentals.

■

Background of Policy Changes: For the sustainable and stable achievement of the 2% price stability
target, the BOJ has emphasized the importance of the positive cycle between wages and prices. In thepast, Governor Ueda has specifically mentioned that the results of the spring wage negotiations in2024 and the transmission of wages to prices are crucial points (for example, during the pressconference following the October 2023 decision meeting). Although it is in line with Governor Ueda’s
previous statements that the policy change is likely to occur after the reassessment of the price outlook
at the next meeting in April, considering the low approval ratings of the ruling Liberal Democratic Party
and the potential of influential political events occurring, it is highly likely that attention was paid toavoid risks associated with postponing the decision.
■Regarding the first point of spring wage negotiations, according to the first response compilation of thespring wage negotiations announced by the union on March 15, the average wage increase rate wasat 5.28%, significantly exceeding the forecasts from the ESP Forecast Survey in February (which
predicted an average total of 3.88% and an average of 4.15% from 8 institutions). In smaller unions,
the wage increase rate was at 4.42%, and for fixed-term, part-time, contract workers, the hourly wage
rate was 6.47%, and the monthly wage increase was 6.75%, indicating broad wage increases wereconfirmed. Although the wage increase rate is expected to see downward revisions with each newresponse, it is likely to stabilize around 5%. Against this backdrop, there is a high possibility that real
income could turn positive compared to the previous year in the latter part of the year. With theexpected improvement in the real income environment, there will be fixed tax cuts in June. As themomentum of the economy improves towards the summer, the BOJ's decision in March may beregarded as appropriate.

■Regarding the second point, the subsequent transmission of wages to prices, positive evaluations
have been made based on the Bank of Japan staff analysis suggesting that there are indications of a
gradual spread of the movement to reflect wage increases in sales prices. The vigorous rise in generalservice prices, which are easily influenced by labor costs, is also seen as positive news (however, thishas been mainly led by dining and accommodation expenses, and assuming certain conditions, thegrowth might slowdown in the latter part of the year in the author’s personal view).

Monetary Policy and Environment Outlook■

In terms of future policy interest rates, the possibility of implementing further rate hikes beyond 25 or
50 basis points by the end of 2025 is considered challenging. From a fundamental standpoint, due tothe prevailing norm in Japan of "interest rates will not rise," the impact of rate hikes may be moresignificant compared to countries like the United States. The presence of a considerable portion of
floating-rate mortgages means that an increase in short-term interest rates affecting mortgage rates
could significantly deter household sentiment. Consequently, the BOJ is expected to carefully evaluate
the repercussions of any rate hikes and make cautious decisions. Additionally, taking into account theimplications on the BOJ's financial standing and the financial markets, prioritizing "balance sheet
reduction" over "steep increases in short-term interest rates" is likely to be favored in a scenario withminimal risks of wage-price spirals. A crucial aspect would be the significance of boosting interest on
excess reserves to guide policy interest rates, with the BOJ's threshold for potential deficits possibly
lying around 50 basis points.

■

Support for the so called "stealth quantitative tightening”?: As mentioned earlier, the author has
speculated that the BOJ may desire a form of "Stealth QT", where balance sheet reduction progresses
without an explicit announcement. In today's policy statement, it was noted that long-term government
bond purchases will be maintained at approximately the same level as before, which aligns almost
proportionately with the redemption of government bonds held by the BOJ in 2024-2025. However, thestatement also includes a note that the actual purchases will be conducted with flexibility, with someroom for adjustment based on market conditions and government bond supply and demand. Duringphases of stable interest rates, it is conceivable that offers may be made closer to the lower end of therange indicated for government bond purchases. In the quarterly schedule for long-term government
bond purchases announced today, the upper limit of the range for each offering had been lowered.
The offerings in February were within this range, maintaining the pace at around 6 trillion yen annually.
The removal of the overshoot-type commitment, the flexibility mentioned in the statement regarding
government bond purchases, and the quarterly schedule range adjustments all seem to support theauthor’s view on the “Stealth QT”.

2

Figure 1. Spring Wage Negotiation - Wage Increase Rateand Union Demands

Forecast(% YoY)(% YoY)

10998

Real personal consumption

8Spring wage negotiations wage increase rate

7Schedule of union demands

7Real scheduled cash earnings

65.85

56435215.28

40-13-221Figure 2. Real Income and Personal Consumption-3-4-589 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23(Yr)Note: Nomura Asset Management based on RENGO (Japanese Trade Union
Confederation) data.

04

0608

10121416182022(Yr)Note: The forecast value of the real scheduled cash earnings is calculated
from the projected value of the spring wage negotiation increase rate, i.e. thenominal scheduled cash earnings forecast minus inflation rate forecast byNomura Asset Management.
Source: Nomura Asset Management based on the RENGO, the Bank ofJapan, and CEIC data.

*This commentary is based on personal views of the author and does not necessarily represent Nomura AssetManagement house view.
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