Is the Bank of Japan close to “tightening” its monetary policy?

Overall inflation in Japan reaches 4.3% in 2023, a pressure on prices that Japan has not experienced since…1981! This pressure has eased significantly in recent months but inflation is still running at 2.2%, a significant level compared to the history of price growth in Japan before the Covid period.

We may be days away from the Bank of Japan’s first rate hike since 2007, which would result in an end to negative rate policy. The “BoJ” key rate is currently -0.1%.

Comments from the Bank of Japan governor this morning add to the idea that a change in monetary policy could happen as early as the March meeting (18 and 19). He said it was entirely possible to exit fiscal stimulus while still trying to meet the 2% inflation target. When negative rates are raised the rate hike limit will be determined by the situation.

He also added that the Bank would consider a gradual withdrawal of its large stimulus program once “the positive cycle of wages and inflation is confirmed.” In order not to overburden the bond market, he also hinted that “regardless of whether the yield curve is retained or relinquished, we will continue to buy government bonds (JGBS)”.

These comments therefore clearly open the way for the first steps towards normalizing Japan’s monetary policy. There was little reaction on the bond market, and in particular on the Japanese 10-year rate, although there was some overreaction on the foreign exchange market, with the yen now moving towards its “high” against the dollar for 1 month ( USDJPY 149.28 yesterday evening currently at 147.88 against), and the Nikkei225 which fell 1.2%.