By Noriyuki Suzuki,
Bank of Japan chief Kazuo Ueda knows the importance -- and difficulty -- of managing people's expectations in carrying out monetary policy.
Under Ueda, the architect of forward guidance or a way of providing tips for its future policy direction, the BOJ draws a sharp contrast with his predecessor Haruhiko Kuroda, who often surprised markets with unexpected moves.
The Japanese central bank on Tuesday decided to abolish its negative interest rate policy and yield cap program, two major remnants of Kuroda's era that were introduced in 2016.
"We communicated through various means beforehand our thinking on how we would change policy, which helped (markets)," Ueda said at a press conference after the announcement.
In the run-up to the latest policy meeting, Ueda repeatedly stressed the prospect of wage growth as a barometer to achieve stable inflation and the need for "continuity" in its broader monetary policy.
Bumper wage hikes of an average 5.28 percent, the sharpest rise in more than 30 years, seen in this year's labor-management negotiations have bolstered BOJ policymakers' confidence in the chances of finally attaining its 2 percent inflation goal. But the jury is still out on how tolerant Japanese firms and consumers can be of the reality of higher interest rates.
"The BOJ has been knowingly behind the curve," said Hideo Hayakawa, a Tokyo Foundation for Policy Research senior fellow.
"Mr. Ueda is acutely aware of the public perceptions that the BOJ's past attempts to tighten monetary policy seen over a quarter century fell flat," the former BOJ official said, adding that the governor has been skeptical about the effects of quantitative easing.
The last time the BOJ went ahead with a rate hike was in 2007, prior to the global financial crisis triggered by the collapse of U.S. investment bank Lehman Brothers Holdings Inc.
Before that was in 2000, when the central bank ended its zero-interest rate policy despite growing political pressure, and Ueda, then one of the board members, voted against it. The dot-com bubble then burst.
Since Ueda took the helm in 2023, the BOJ gradually began the groundwork for a departure from what former governor Masaaki Shirakawa dubbed a "great monetary experiment" that started in 2013 under Kuroda.
Immediately after Ueda assumed the post, the BOJ made it crystal clear that wage growth holds the key in future policy changes, adding a specific reference underscoring its importance in its post-meeting statement.
Ueda continued to underscore the need of persisting with monetary easing despite Japan's headline inflation far exceeding the 2 percent target, driven by higher import costs while effectively gutting its program to artificially depress borrowing costs.
Ueda, along with other board members, began to express growing confidence about the likelihood of attaining stable inflation with the help of pay hikes around late 2023 and Hajime Takata, who sits on the nine-member Policy Board, said in February that the 2 percent goal is "finally in sight."
"The BOJ has wanted to make its monetary easing simple because the framework has become a complex patchwork of various tools," said Mari Iwashita, chief market economist at Daiwa Securities. "The point is, 'Simple is best.'"
"When the Fed (Federal Reserve) is seen as cutting rates this year, it's unlikely that the BOJ will continue hiking interest rates given Japan's potential growth rate is low and there is concern about a further strain on state coffers," she added.
Businesses and consumers will have to pay more to take out loans while commercial banks and other financial institutions may see their profitability improve when the BOJ raises interest rates. For heavily indebted Japan, this will mean more debt-servicing costs.
Conditions for the BOJ to remove the world's last negative rate fell into place ahead of the policy meeting. Japan's core inflation has remained above 2 percent for nearly two years, and the economy just averted a technical recession or two consecutive quarters of contraction when the country's real gross domestic product was revised upward for the final quarter of 2023.
The BOJ faced little political pressure to persist with monetary easing, which formed a key pillar of the economy-boosting "Abenomics" led by former Prime Minister Shinzo Abe.
"It's up to the BOJ to decide how the current inflation trend should be explained, but the rate is far above 2 percent, which is a fact," said a Japanese government official.
"There are of course positives if the BOJ makes changes...like slowing the yen's depreciation," the official added before the policy meeting.
After the BOJ announcement, the yen slipped past the psychologically important 150 mark against the U.S. dollar.
A weak yen, the byproduct of powerful monetary easing, has exacerbated the pain of resource-scarce Japan by inflating import costs, prompting the government to announce inflation relief measures such as a temporary income and residence tax cut.
The focus is on whether the government will move to officially declare an end to deflation, or prices continuously falling, as it sticks to a joint accord with the BOJ to pursue monetary easing to beat deflation.
Years of ultraloose monetary policy have bloated the BOJ's balance sheet to 741 trillion yen ($5 trillion), at the end of September last year, bigger than the Japanese economy totaling roughly 590 trillion yen. The bulk was in Japanese government bonds, on top of exchange-traded funds.
"The BOJ will likely remain dovish for a while when private consumption remains weak, and thus the risk of a further fall in the yen remains," said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute.
Kumano, a former BOJ official, said the Japanese central bank needs to continue "paying the price" for the large-scale monetary easing of the Kuroda era and incumbent Ueda will likely have to wait until he can truly show his own approach.
"It will be years before the BOJ starts seriously trimming the balance sheet. It may well be a Pandora's box to be opened," he said.
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