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Solid wage growth, not a spiralling yen, is likely to be the trigger that drives the Bank of Japan away from its ultra-low interest rates as the policymakers cling stubbornly to hopes a tight job market will eventually revive consumer demand.
With Japan’s economy still weak, the BOJ is not expected to raise interest rates in the near-term, even if that means more downward pressure on the yen, which has plunged to 32-year lows against the dollar and inflated import costs for businesses.
But the focus could shift to the BOJ’s controversial bond yield cap toward April next year, say four sources familiar with the central bank’s thinking, when companies and labour unions set next year’s wages that will reflect the rise in inflation in 2022.
Governor Haruhiko Kuroda will also see his second, five-year term end in April, opening the prospect of a gradual shift away from his radical stimulus programme, analysts say.
“It’s a once-in-a-lifetime opportunity for Japan to finally see a positive wage-inflation cycle kick off,” said one of the sources. “It’s also a critical moment for the BOJ in deciding what to do with its yield cap.”
Investors are on high alert for when the BOJ will shake off its status as a dovish outlier among global central banks by tweaking yield curve control (YCC), under which it sets negative short-term rates and caps the 10-year bond yield around zero.
Were the BOJ to tweak YCC, the most likely first step would be either to hike the 10-year yield target, or widen the implicit 50-basis-point band set around it.
