BOJ Considers Exiting Negative Interest Rates

BOJ Considers Exiting Negative Interest Rates

February 15, 2024

A former Bank of Japan (BOJ) board member suggests the central bank may exit its negative interest rate policy in the upcoming spring, facing challenges amid Japan's sluggish economic growth. BOJ Governor Kazuo Ueda is under pressure to counteract the yen's depreciation fueled by the contrast between high U.S. interest rates and Japan's ultra-easy monetary policy. However, the BOJ is also constrained by concerns about high inflation, viewed as unsustainable and detrimental to domestic demand, potentially leading to a technical recession. This unexpected downturn has relegated Japan's economy to the world's fourth-largest position, trailing behind Germany.

Sayuri Shirai, an economics professor at Keio University and former BOJ policy board member, believes the BOJ is likely to implement policy changes, including removing negative interest rates, in the spring due to concerns about potential side effects. Despite the challenges and dilemma faced by the BOJ, market participants anticipate some normalization of policy in the near future, particularly given the recent yen weakening against the dollar. The persistent weakness of the yen not only impacts Japanese consumers' purchasing power but also diminishes the value of the country's exports.

The yen's retreat to around 150 against the dollar this week, alongside higher-than-expected U.S. inflation data, has dashed hopes for a swift Federal Reserve rate cut. Consequently, the BOJ sees an opportunity to make adjustments and expects market expectations for policy normalization in the spring. Regardless of achieving its 2% inflation target in a stable manner, the BOJ is likely to undertake policy changes to address challenges posed by the yen's depreciation and the broader economic landscape, signaling a potential shift in Japan's monetary policy approach.

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