BoJ Preview: Forecasts from 12 major banks, on the verge of ending negative rates

We think the BoJ is likely to end its negative interest rate policy (NIRP) in March rather than April, alongside a de facto removal of yield curve control (YCC). While the JPY has rallied and markets are already pricing in 6bps of hikes by April, we think the BoJ could surprise with an earlier move in March. Even if the BoJ does not hike in March, the market would expect it to hike in April; market reaction should therefore be limited either way. 

Shunto wage negotiations have started stronger than last year, giving the BoJ a green light to move away from negative rates at its policy meeting this week. Our central case for the BoJ to exit negative interest rates remains in April, but it is an extremely close call. The BoJ will be updating its forecasts at that meeting and it will have more news on union-based wage agreements and data on business inflation expectations. Media reports suggest the BoJ is close to exiting YCC. The central bank may also consider dropping its guidance that interest rates could go lower and end its J-REIT and ETF asset purchase programs.

We believe that the BoJ will signal that rates will likely be raised at the April meeting after the announcement for wage growth above 5% for the largest workers union. With wage growth the highest in three decades and inflation above 2%, the negative interest rate era in Japan is about to end. However, we don’t expect a massive rate hiking cycle from the BoJ. The BoJ will take baby steps when hiking rates to ensure that the inflation dynamic is around 2%. As such, no major JPY strengthening will come so long as the Fed and ECB keep rates unchanged.

The inflation target has been met for 22 consecutive months. Price pressures consistently rhyme with 2% annual inflation but the sustainability of that depends on wage increases. We think the BoJ is almost ready to hike the interest rate to zero and dismantle yield curve control. However, we see no reason to rush and expect them to stay on hold at the March meeting ending Tuesday, but it is admittedly a close call. Whether the BoJ potentially exits NIRP in March or April does not alter our strategic bullish view on the JPY in 2024.

We believe that an April hike is slightly more likely than a March hike. This week, we expect the BoJ to change its forward guidance and scrap the yield curve control policy but keep its government bond purchase programme.

We expect the BoJ to revise its policy and abandon both NIRP and the multi-tiered current account structure and set rates on all excess reserves at 0.1%. We also see both the YCC and the inflation-overshooting commitment ending, replaced by a benchmark for the pace of the bank’s JGB purchasing activity.

Although we do not rule out the possibility of a March hike, our expectation is for the BoJ to stay pat at its March meeting. With consumption still weak, the central bank may wait until Q2 to see further confirmation in the macro data before hiking its policy rate for the first time in 17 years. In any case, we only foresee a very gradual, and modest hiking path for the BoJ going forward.

After the positive round of wage increases and Rengo's announcement delivering a 5% increase in 1st round wage negotiations, we believe the BoJ has the information it needs to hike at this meeting. We expect the BoJ to 1) terminate NIRP, 2) tweak the deposit framework 3) end YCC but retain Q1 bond buying pace and 4) discontinue its ETF and J-Reits purchases.

While we believe the BoJ will exit negative interest rates and measures designed to keep bond yields capped in April, Tuesday's meeting seems to be live. The decision on policy rates and yield curve control will be closely watched; however, forward guidance may be just as important. In the event of a rate hike this week, or in April, we will be watching for if BoJ policymakers indicate whether future tightening will also be delivered. In our view, the BoJ is likely ‘one and done,’ meaning one rate hike to get the main policy rate to 0.00%, exit YCC, and leave policy settings there for an extended period of time. Those decisions alone should result in JPY outperformance, but an indication of future tightening could result in a sharper Yen rally than we expect.

We shift our baseline scenario to NIRP termination at the April 2024 MPM and therefore expect BoJ to signal termination at the March 18-19 MPM. From a macroeconomic standpoint, it makes little difference whether termination is in March or April. The more important point is the size of the wage hikes agreed upon in spring negotiations. Larger-than-expected wage hikes could boost the outlook for consumer spending, inflation, and the speed of rate hikes. If there are really hefty hikes, Governor Ueda’s press conference is likely to call for changes in the perception of the inflation risk balance. We also expect the BoJ to halt Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control and drop the guidance of expansion of the monetary base. 

We expect the BoJ to abolish negative interest rates and YCC this month, but we also think it will signal to keep the zero rate for some time and maintain a monthly pace of 6tn yen in JGB purchases, which would keep the balance sheet stable for now. 

Our base case is for the bank to keep the policy rate at -0.10% and stick with its 10-year JGB yield target of ‘around’ 0% with 1% as an upper bound reference.  We also expect the BoJ to terminate its guideline to purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs). USD/JPY is vulnerable to a kneejerk drop if the BoJ delivers a rate hike. However, USD/JPY uptrend will likely remain intact because Japan’s improving inflation backdrop and soft economic activity suggest the BoJ is unlikely to normalize the policy rate by more than is currently priced in over 2024.