The Bank of Japan maintained its ultraeasy monetary policy Tuesday despite its increased confidence about the inflation outlook, as the central bank seeks to ensure pay hikes by Japanese firms this year will pave the way for its 2 percent target to be finally achieved.
BOJ chief Kazuo Ueda said that the likelihood of hitting the inflation target is "gradually rising" and that negative interest rates will end when the goal comes into view, amid market expectations that such a decision will come as early as this spring.
Still, he gave no clear hint as to when it might be, reiterating that the outcome of the annual "shunto" wage negotiations between labor unions and management that will effectively begin Wednesday will be important in guiding monetary policy.
At the end of a two-day policy meeting, the nine-member Policy Board kept short-term interest rates at minus 0.1 percent while maintaining the 10-year Japanese government bond yield around 0 percent with a 1 percent upper bound under its yield cap program.
No change was made to the wording of the central bank's policy guidance, which said it will "patiently" persist with monetary easing until 2 percent inflation is achieved.
As the lagging effects of higher energy and raw material costs ease, the BOJ expects core consumer prices, excluding volatile fresh food items, to rise 2.4 percent in fiscal 2024 starting April, down from its earlier estimate of 2.8 percent.
In fiscal 2025, however, the closely watched gauge of inflation is expected to hit 1.8 percent, up slightly from 1.7 percent projected earlier.
The revisions project Japan's core consumer inflation remaining above the BOJ's target for three straight years through fiscal 2024, even as it maintains that it does not believe the inflation target will be achieved stably and sustainably unless the momentum for wage growth accelerates.
"The likelihood of the underlying inflation rate moving toward 2 percent continues to rise," Ueda told a post-meeting press conference.
The BOJ chief said he is keeping close tabs on services prices, which are less sensitive than goods prices to cost-push factors, in order to confirm the sustainability of inflation.
Financial markets had expected no change during the first policy meeting of 2024, especially in the aftermath of a powerful earthquake that shook central Japan on New Year's Day. Ueda said the quake's economic impact will be "carefully monitored."
The focus has shifted to when the BOJ will move away from its ultralow rates. BOJ watchers are betting that the central bank will end its negative rates this spring, possibly in April, after confirming the results of the wage talks expected around March.
"Even if attaining the inflation target comes into sight, and we end the negative rates, extremely accommodative monetary conditions will continue for the time being," he said, suggesting that the BOJ will be in no hurry to bring borrowing costs higher.
After Ueda took the helm of the dovish central bank last year, the BOJ added a reference to the need for pay hikes to attain its long-elusive inflation target.
"It wouldn't be much of a surprise even if the BOJ does ditch negative rates in March or April," said Toru Suehiro, chief economist at Daiwa Securities Co.
But he added that the BOJ "does not seem to be in the mood to lay the groundwork," suggesting that the central bank is reluctant to move because the government is seeking to boost household disposable income.
Japan's real wages have been declining as wage hikes continue falling behind price increases. Suehiro expects an end to the negative rate policy in 2025 or later.
The government has said that Japan has a "once-in-a-lifetime" chance to make a complete break from the deflation that had plagued the nation for over a decade, as Prime Minister Fumio Kishida is calling on corporate management for more pay increases to support households.
"Deflation means the inflation rate is in negative territory. We have come farther away from it," the BOJ governor said.
Some analysts say the longer the BOJ waits, the harder it will get for the bank to shift from its ultralow rates. The U.S. Federal Reserve and the European Central Bank are expected to start cutting interest rates this year, easing some yen-selling pressure relative to the dollar and the euro.
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