"Last Samurai" Surrendering? Bank of Japan Governor Hints at Possible End to Negative Interest Rates

In his first independent media interview since taking office, Bank of Japan Governor Haruhiko Kuroda signaled the possibility of "ending negative interest rates."

On Saturday, Kuroda gave an exclusive interview to Japanese media, where he pointed out that "ending negative interest rates is one of the feasible options" if the Bank of Japan is confident that prices and wages will continue to rise.

As for the specific timing, Kuroda stated:

"We are currently not at a stage where we can make a definite decision. The Bank of Japan may obtain enough information and data by the end of the year to judge whether wages will continue to rise."

He believes that there is still a distance to go in achieving the price stability target and will continue to implement loose monetary policy.

Some analysts pointed out that the most important aspect of this interview is that Kuroda maintains a relatively open attitude towards the timing of interest rate hikes. Implicitly, he means that it is not necessary to be "certain" about the trend of inflation, just "reasonably certain." Japan's departure from negative interest rates should be within reach.

Countdown to the End of Negative Interest Rates

To revive the economy and achieve sustainable inflation, the Bank of Japan implemented a negative interest rate policy, keeping short-term rates at -0.1% and setting the upper limit of 10-year government bond yields near zero.

With the inflation target of over 2% having been in place for over a year, the market speculates that the Bank of Japan will soon begin raising interest rates. However, Kuroda emphasized that it is necessary to maintain an ultra-loose policy until the Bank of Japan is confident that the inflation rate will remain around 2%.

Kuroda stated that the Bank of Japan will not turn a blind eye to the risk of inflation exceeding expectations and added that wage increases have already started pushing up service prices. The key is whether wages will continue to rise next year. Kuroda stated that it is possible to obtain enough information and data by the end of the year regarding the timing of ending negative interest rates.

Kuroda believes that the Bank of Japan's view on price trends has to some extent underestimated the rise in inflation. He also hinted that due to soaring prices, the Bank of Japan may shift its stance towards a tightening policy.

However, according to a senior official at the Bank of Japan, Kuroda intends to maintain the basic monetary framework, including the negative interest rate policy, based on his experience.

From 1998 to 2005, Kuroda was a member of the Bank of Japan's Policy Board, which is responsible for determining monetary policy. In 2000, Kuroda opposed the committee's plan to abandon zero interest rates, citing concerns about deflation.

Kuroda has been waiting for Japan to completely overcome deflation for a quarter of a century. If the Japanese economy returns to a phase of continued price declines, the Bank of Japan will have limited room to implement monetary easing measures.

At the July monetary policy meeting, the Bank of Japan set the upper limit of the yield curve control (YCC) at 1.0% to keep long-term rates around 0%. Kuroda referred to the decision to set long-term rates at a level that will not be reached in the foreseeable future as "risk management." He explained that there is no risk of the Bank of Japan abandoning YCC when the economic and price outlook improves.

Japanese officials issue warning on weak yen

Against the backdrop of Japan's persistent loose policy, the yen continues to weaken, prompting frequent warnings from Japanese officials.

On Tuesday, Deputy Finance Minister for International Affairs, Masato Kanda, stated that if these actions continue, the government will handle the situation appropriately without excluding any options.

On Thursday, Bank of Japan board member Junko Nakagawa stated that the central bank will closely coordinate with the government to monitor foreign exchange rates and their impact on the economy. On Friday, Finance Minister Toshimitsu Motegi stated that he will respond appropriately to excessive volatility in the foreign exchange market, without ruling out any options.

The timing of these statements is noteworthy as they come ahead of the G20 summit and the upcoming meeting of central bank governors at the Bank for International Settlements in Switzerland, which may serve as venues for discussions on monetary policy beyond Japan.

Some analysts believe that the time may be ripe for the Bank of Japan to address the issue of the weak yen. Core inflation is at a historical high, and the yen is weak. There are indications that consumption is beginning to rise steadily, with credit card usage, department store sales, and internet services all showing an upward trend. Additionally, stock and real estate prices in Japan are also on the rise.