By Leika Kihara
TOKYO (Reuters) – The Bank of Japan is widely expected to retain its ultra-easy monetary settings on Tuesday, as policymakers assess the progress made by the economy towards meeting the conditions for phasing out the decade-long accommodative policy.
While the BOJ has its eyes set on ending negative interest rates, many in the bank likely prefer to spend more time determining whether wage increases will broaden enough to keep inflation sustainably at its 2% target, sources have told Reuters.
None of the economists polled by Reuters expect the central bank to end its negative rate policy at the conclusion of its two-day meeting on Tuesday, though many see it happening as early as April.
Traders are focusing on any clues provided by governor Kazuo Ueda on how soon the BOJ will pull short-term rates out of negative territory, which is seen as the next move Ueda will take in dismantling his predecessor’s radical stimulus programme.
“The chance of Japan seeing a positive wage-inflation cycle kick off is heightening,” said former top BOJ economist Seisaku Kameda. “The question is whether that will be sustained, which is something the BOJ probably wants to scrutinise,” Kameda said, adding he expects negative rates to end in March or April.
Markets widely expect the BOJ to maintain on Tuesday its short-term rate target at -0.1% and that for the 10-year bond yield around 0%. Ueda will hold a press conference after the decision, which usually starts around 0630 GMT.
In a quarterly outlook report due after the meeting, the BOJ is likely to roughly maintain its forecast that an index gauging trend inflation will stay near its 2% target in coming years.
The BOJ’s meeting precedes that of the European Central Bank on Thursday and the U.S. Federal Reserve next week, both of which aggressively tightened monetary policy last year and are now contemplating cutting interest rates ahead.
Japan has seen inflation exceed the BOJ’s target for well over a year. But Ueda has stressed the need to hold off on raising rates until there is more evidence that inflation will durably stay around 2%, accompanied by solid wage growth.
Surveys and comments from business lobbies have shown an increasing chance Japan’s spring wage hikes will be above last year’s 30-year high 3.58% for major firms – a key prerequisite set by the BOJ for exiting ultra-loose monetary policy.
But the chance of success in meeting another prerequisite, which is a steady rise in services prices, remains uncertain.
While services prices have crept up, the increases are concentrated on sectors benefitting from a rebound in inbound tourism or where labour shortages are acute.
Japan’s decade-long history of stagnant wage growth has made it difficult for companies to pass on labour costs through price rises. A BOJ report showed some smaller firms in regional areas remain wary of hiking pay, keeping policymakers cautious of ending negative rates too soon.
Recent soft data have added to the drag on Japan’s fragile economic recovery and heightened uncertainty on the timing of an exit. Service-sector activity slid 0.7% in November from the previous month, data showed on Monday, underscoring the weakness in consumption.
Factory output is likely to take a hit from weakening demand in China and a production halt at Toyota Motor’s small-car unit which is under investigation for misconduct over safety tests.
Toru Suehiro, chief economist at Daiwa Securities, sees a growing chance Japan may have suffered two straight quarters of contraction in October-December on weak output and consumption.
“It’s hard to be optimistic about Japan’s economy,” which means the BOJ probably needs to await October-December gross domestic product (GDP) data due in February, said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.
(Reporting by Leika Kihara; Editing by Shri Navaratnam)
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