Key Takeaways

  • There has been persistent speculation about the end of yield curve control (YCC) and negative interest rate policy (NIRP) in Japan. 
  • The Bank of Japan’s (BoJ’s) changes to the YCC framework in June and October, raising the trading range for 10-year yields, helped fuel this. 
  •  More fundamentally, the policy path depends on whether the country has exited three decades of low or negative inflation. Certainly, the recent global inflationary environment has raised Japan’s headline and core measures to more than double the 2% target.

  • But pandemic- and Ukraine-related pressures are now unwinding. The true tests of a new inflation regime are wage growth and inflation expectations. 
  • The 2023 Shunto spring wage negotiations were the strongest since the early 1990s, resulting in a 3.6% wage hike. The current elevated rate of inflation and corporate earnings growth could see another 3%+ Shunto agreement in 2024.  
  • However, this has yet to be reflected in realised earnings growth. Meanwhile, inflation expectations have picked up, but may be weakly entrenched given the historical experience. 
  • So the BoJ’s exit path will be very cautious. We don’t expect any changes between now and mid-2024. But we think another decent Shunto wage round could prompt the BoJ to drop YCC and raise the policy rate to 0% at that point. That said, we don’t envisage further rate hikes over our forecast horizon, so Japan may only be replacing negative rates with zero rates. 

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