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Japan Monetary Policy March 2024

Japan: BOJ hikes for first time in 17 years in March

On 18–19 March, the Bank of Japan (BOJ) raised its policy rate—for the first time in 17 years—from -0.10% to 0.00–0.10%. It also removed its 1.00% soft cap on 10-year government yields.

Until recently, the market had expected that the BOJ would hike rates in April, not March. However, expectations shifted after Japanese unions and large firms finished annual wage negotiations in mid-March, resulting in an estimated wage hike of over 4%—the highest since the early 1990s. As expected by the market, this pushed the BOJ to hike in March instead of April, with the Bank stating in its policy statement that it judged that the “virtuous cycle” between wages and prices “came into sight.”

Our panelists expect the BOJ to continue hiking ahead, but only cautiously. Despite the bumper pay rise achieved by unions in March, inflation is still projected to fall below the BOJ’s 2.0% target in Q4 2024. Meanwhile, in a post-meeting press conference, BOJ Governor Kazuo Ueda said the Bank would switch to using the policy rate as its main monetary policy tool, instead of relying on purchases of government bonds. Looking ahead to further monetary policy moves, the key factors to watch will be commodity prices and the extent to which recent wage hikes boost price pressures.

The Bank’s next meeting is scheduled for 25–26 April.

ING’s Min Joo Kang and Chris Turner commented:

“In the short term, it will be important to see whether or not the strong wage growth of large companies spills over to SMEs. The results of the second and third rounds of wage negotiation will be announced on 22 March and 4 April. From a medium-term perspective, strong wage growth could lead to strong consumption and sustainable consumer prices. We may see the impact of the wage growth in the April/May earnings data. We also expect a big bonus payment before the Golden Week holiday.”

Goldman Sachs analysts said:

“Governor Ueda also pointed to the possible risk that a rapid increase in interest rate could cause unexpected disruption to the economy, including the financial system, as Japan has been in a zero-bound environment for a prolonged period of time. This also implies that, even if conditions prove ready for the next rate hike, the BOJ intends to avoid a rapid increase of the short-term rates.”

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