Without fear of economic recession, the Bank of Ja

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Sources familiar with the Bank of Japan's thinking said the Bank of Japan is still on track to end negative interest rates in the coming months despite the economy sinking into recession, although weak domestic demand means they may seek more clues on wage growth before taking action.

Analysts were stunned on Thursday when data showed Japan's gross domestic product unexpectedly contracted for a second straight quarter, meeting the broad definition of a "technical" recession and costing the country its status as the world's third-largest economy.

Japan's economy slips into technical recession

While headlines about Japan's GDP are alarming, Bank of Japan policymakers are focused on whether the sharp wage rises set to happen in 2024 will be repeated next year, as the country sees a break from decades of tepid household consumption. Necessary conditions for fire.

Therefore, for the Bank of Japan, annual wage negotiations this spring to determine wage levels for 2025 remain a more important economic indicator than fourth-quarter GDP, which has a lag.

Meanwhile, weakness in the consumer sector in the GDP data means the Bank of Japan is now more likely to end negative interest rates at its April meeting rather than its March meeting, which would give the central bank more time to understand the health of the Japanese economy. situation.

"Domestic demand does lack momentum," one source said. "But GDP is just one of many data points that the BOJ focuses on." Another source said: "What matters is the overall trend and outlook for the economy." A third source People also agree with this view.

Bank of Japan Governor Kazuo Ueda, who took office last year, has been laying the groundwork for a move away from the aggressive monetary stimulus introduced by his predecessor, Haruhiko Kuroda, who was blamed for causing severe distortions in financial markets.

On Friday, Kazuo Ueda insisted that despite the release of GDP data, adjusting various monetary easing measures, including negative interest rates, was still an option.

Bank of Japan more likely to raise interest rates in April

The deepening labor shortage has prompted many Japanese companies to signal significant wage hikes, bolstering hopes for widespread wage growth that will boost household purchasing power to cope with steady price increases.

The Bank of Japan hopes higher wages and waning cost pressures will support consumption and the broader economy, keeping inflation sustained near its 2% target and normalizing its monetary policy.

Last week, BOJ Deputy Governor Shinichi Uchida gave an in-depth explanation of the BOJ’s plans to unwind its complex ultra-easy monetary policy, including a pledge to avoid a rapid rise in borrowing costs after ending negative interest rates.

These carefully delivered signals have led most market participants to predict that the Bank of Japan will end negative interest rates at its March 18-19 or April 25-26 policy meeting. A Reuters poll conducted after Japan's GDP data was released showed that all 10 economists surveyed predicted that negative interest rates would end in April.

Delaying the exit from negative interest rates could accelerate the yen's recent decline and push up import costs, hurting already weak consumption.

A fourth source said: "The market has fully priced in the possibility of action in March or April. If the BOJ abandons action, it could cause a huge shock to the market."

Although the Bank of Japan sticks to its plan to exit negative interest rates in the near term, it may prefer to take action in April rather than March to assess more data given the uncertainty about the economic outlook.

Some analysts expect Japan's economy to contract again this quarter as sluggish consumption and labor shortages delay capital spending.

Key data that BOJ policymakers are likely to focus on before the March meeting include the outcome of wage negotiations between major companies and labor unions on March 15.

Revised fourth-quarter GDP data due out on March 11 may also be important, as past data have seen sharp revisions, especially in capital spending, which could affect the view on the economy.

Another advantage of waiting until the April meeting to raise interest rates is that policymakers can carefully scrutinize the Bank of Japan's quarterly Tankan survey report released on April 1 for clues on whether companies are maintaining optimistic capital spending plans.

"If the Tankan survey report highlights the resilience of capital spending, that could offset the impact of weak GDP," said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities, who predicts an end to negative rates in April.

The BOJ's quarterly meeting of regional branch managers due in mid-April will also give board members a fresh look at whether wage increases are spreading across the country.

Analysts said the Bank of Japan may continue to signal that it will not follow the Federal Reserve's lead in raising interest rates after ending negative interest rates, given the need to reassure politicians about the risk of a further recession.

"The Bank of Japan may continue to explain that ending negative interest rates does not mean tightening monetary policy," said Koichi Fujishiro, chief economist at Dai-ichi Life Research Institute.

Article forwarded from: Golden Ten Data

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