By Emmanuel Yashim
A growing number of Bank of Japan (BOJ) policymakers are warming to the idea of ending negative interest rates this month on expectations of hefty pay hikes in this year’s annual wage negotiations, four sources familiar with its thinking said.
Upon ending negative rates, the central bank is also likely to overhaul its massive stimulus programme that consists of a bond yield control and purchases of riskier assets, they said.
The bank’s strategy for an orderly exit from years of massive stimulus unraveled on an overcast day in December when the Governor of BOJ, Kazuo Ueda, and two deputies gathered at the Tokyo headquarters of the institution.
Inflation was slowing more than expected, complicating the central bank’s plan to end negative interest rates by March or April and follow quickly with further increases.
The officials considered two alternatives.
The first option was to wait for signs of economic improvement and go ahead as planned.
The second was to end negative rates but hold off on subsequent increases.
Ultimately, the MIT-trained Ueda went with the second option by allowing Japan to shed its title as the last country with negative interest rates but leaving it short of its hoped-for normalisation and still facing years of near-zero rates that pressure the hard-hit yen.
“With the economy lacking momentum, there was a growing feeling within the BOJ that inflation might not stay around 2 per cent that long,” said one person familiar with the deliberations, referring to the bank’s key target.
“The BOJ leadership probably realised that time was running short if they wanted to end negative rates.”
The decision was also complicated by differences between Ueda’s two deputies, as well as the governor’s wavering on the exit timing.
The existence of the two plans, and other details about the deliberations, are reported for the first time by Reuters.
This account is based on interviews with 25 incumbent and former central bank officials with direct knowledge of the interactions, or familiar with the personalities and dynamics of the bank’s leaders, as well as five government officials in regular contact with BOJ officials.
They all spoke on the condition of anonymity as they were not authorised to discuss the matters publicly.
A BOJ spokesperson said the bank would not comment on the deliberations outlined by Reuters.
Reuters also spoke to five small-business owners to gauge how the policy shift could unfold across an economy battered by decline and deflation.
On Tuesday last week the BOJ drew the curtain on eight years of negative rates and other remnants of unorthodox policy, delivering its first increase in borrowing costs since 2007.
“It’s a watershed moment for Japan and central banks across the world, as it finally puts an end to abnormal monetary stimulus,” said former BOJ official Nobuyasu Atago.
Still, he said, it could take several years for short-term rates to move up to even 1 per cent.
Even a slight rise in interest rates could send tremors through struggling local economies in Japan, reflecting how deflation and a diminishing population have squeezed demand.
“The prospect of higher interest rates has become a significant concern for traditional inns,” said Koji Ishida, who runs a hotel company and heads the local tourism association in Yugawara, a hot-spring resort southwest of Tokyo known for its ryokan, or traditional inns.
In autumn, Ishida received a frantic call from the family that owns one of the town’s most storied ryokan, saying it was nearing collapse and asking for help.
“As neighbours, we needed to help them,” Ishida said. He worried the failure of a prominent ryokan could tarnish the image of tourism-dependent Yugawara and trigger “a chain reaction of bankruptcies”.
Seiranso, a 94-year-old ryokan known for its mountainside outdoor bath at the foot of a waterfall, last month filed for bankruptcy protection with around 850 million yen (5.7 million dollars) in debt, including pandemic loans.
Under those proceedings, it aims to turn itself around with backing from Ishida’s company, according to its website. A lawyer for Seiranso declined to comment.
Almost one-third of ryokan lost money in the past financial year, according to data from the Japan Ryokan and Hotel Association, an industry group.
“The industry needs zero-interest rates,” said Masanori Numao, whose family runs a ryokan in Kinugawa Onsen, a hot-spring resort in Nikko National Park, where their roots go back more than 300 years.
Forty years ago, Kinugawa was thriving; after sunset, there were “beautiful geisha”, the clatter of wooden geta clogs, and laughter from karaoke bars on the narrow streets, Numao said.
Today, tourists sometimes photograph derelict hotels abandoned after the bubble economy burst in the early 1990s.
Ryokan owners struggle to renovate aging buildings because banks are unwilling to lend them more, making it difficult to attract tourists, Numao said.
He said higher interest rates would pressure hot-spring towns like Kinugawa, adding: “The government is just watching resort towns drown.”
In taking over the BOJ last April, Ueda was mandated to dismantle the radical stimulus of his predecessor, Haruhiko Kuroda.
Kuroda’s “bazooka” approach initially helped boost stock prices. But it crushed bank margins and caused unwelcome yen declines that lawmakers feared could hurt voters through rising living costs.
Ueda and his deputies were unanimous on the need for an exit, but not on the timing.
Choosing the second option mended, at least momentarily, the quiet tension between the two deputy governors, career central banker Shinichi Uchida and former bank regulator Ryozo Himino.
Ueda, Uchida, and Himino did not respond to Reuters questions. (NANFeatures)
