The Bank of Japan will likely maintain its accommodative policy stance even if it moves to end its negative interest rate after achieving stable inflation, a deputy chief said Thursday.
Deputy Governor Shinichi Uchida said the likelihood of attaining the central bank's 2 percent inflation target accompanied by pay hikes is "gradually rising" but it needs to examine more data, including the outcome of spring wage negotiations between management and labor unions.
Uchida, who has played a pivotal role in the crafting of the BOJ's powerful monetary easing over the past decade, ruled out the possibility of aggressive rate hikes, saying Japan is seizing an opportunity to do away with a mindset rooted in its past experience of deflation.
"Even if the bank were to terminate the negative interest rate policy, it is hard to imagine a path in which it would then keep raising the interest rate rapidly," Uchida said during a meeting with local business leaders in Nara Prefecture, western Japan.
"The bank would, I think, maintain accommodative financial conditions even if the termination were to take place."
Financial markets expect the BOJ to end its negative rate policy as early as this spring when the results of "shunto" wage negotiations will have been released.
BOJ board members have expressed confidence that the momentum for robust pay hikes, a requisite for Japan to achieve stable inflation, is building.
Uchida said important factors to monitor are the pace of wage growth and whether more Japanese companies will continue to raise prices to reflect higher personnel costs.
Higher import costs have been blamed for driving up Japan's inflation for well over a year, but the BOJ has maintained that the effects of such cost-push factors are wearing off.
While the overall framework for keeping borrowing costs extremely low remains in place, the BOJ has gradually loosened its yield curve control, allowing 10-year Japanese government bond yields to rise above 1.0 percent.
If the BOJ revises the framework, it will "incline more toward letting interest rates be determined by the market," Uchida said, adding that it will avoid creating "discontinuity" before and after its decision and ensure that the amount of bond buying will not change significantly.
The BOJ has gobbled up huge amounts of government bonds and other assets such as exchange-traded funds and Japan real estate investment trusts to support the economy.
"Once sustainable and stable achievement of the 2 percent target comes in sight and the bank revises the large-scale monetary easing, it would be natural to discontinue these purchases," Uchida said.
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