The Bank of Japan maintained its moderate stance following the results of its last monetary policy meeting this year, although markets are signaling growing confidence that the financial regulator is gradually approaching the normalization of its activity strategy.

Kazuo Ueda, governor of the central bank of the mentioned country, said that his job will become more difficult towards the end of this year. Against this background, speculation about a change in the monetary policy of the financial regulator has intensified.

Kazuo Ueda in early December, during the parliamentary session, increased expectations that the Bank of Japan might send some signals about a change in the concept of activity at its December meeting. Against this background, the yen strengthened, which, according to some experts, is due to speculation. The national currency of Japan strengthened against the US dollar to the range of 141 yen from the level of 147 yen.

On Tuesday, December 19, Kazuo Ueda, when asked if he hinted at a faster normalization of monetary policy, said that the comment in the early current month concerned his general position on the eve of the second year of work. The Governor of the Bank of Japan also noted that he needs to prepare even more for the challenges of managing the specified policy.

Toru Suehiro, chief economist at Daiwa Securities, the financial regulator’s rejection of negative interest rates in January is an unlikely scenario. At the same time, many analysts expect that the Bank of Japan will make an appropriate decision. Kazuo Ueda’s statements made on Tuesday indicate that these expectations are likely to collide with a reality that does not correspond to their content.

Toru Suehiro noted that the position of the central bank, indicated on Tuesday, does not actually signal changes in monetary policy. The expert also stated that the tightening of this policy is, in principle, a negative circumstance for the economic system. Toru Suehiro says that negative interest rates provoke complications for lenders. According to the experts, the Bank of Japan will create the basis for preparing financial institutions for change.

At a press conference, Kazuo Ueda hinted that the organization he heads needs more time to decide on monetary policy. He also said that the financial regulator’s confidence is growing that the stable inflation target of 2% is close. At the same time, Kazuo Ueda noted that the Bank of Japan still has to make sure that the cycle of wage growth and price increases will be stronger in the future.

Many economists assume that the financial regulator of the Asian country intends to take serious measures and abandon ten years of monetary stimulus. One of the solutions in such a scenario may be the cancellation of the program of negative interest rates and control of the yield curve. According to some experts, the Bank of Japan may take this step in April 2024.

Expectations, aspiring for the middle of spring, provide the financial regulator with time to track dynamic salaries. Depending on the development of the situation, at the beginning of next year, the Bank of Japan will form a final position on approaching the inflation target of 2%.

The growth rate of the cost of goods and services in the Asian country exceeded the 2% mark for almost two years. To a large extent, this inflationary dynamic is due to temporary factors, including the rising price of commodities and the weakening of the yen. At the same time, the increase in wages showed a clear lag behind the price increase.

In October of this year, the Asian country recorded the 19th consecutive drop in real wages. This result was observed at a time when the Japanese Trade Union Confederation, better known as Rengo, stated that the average increase in the mentioned indicator among 5,272 of its affiliated unions after the spring negotiations this year was 3.58%. In this case, the highest wage growth has been recorded in the last three decades.

At a press conference on Monday, December 19, Masakazu Tokura, chairman of Keidanren, Japan’s largest business lobby, said that member companies are eager to contribute to further salary increases. He also said that firms declare their readiness to implement these intentions with even greater enthusiasm compared to last year.

Masakazu Tokura says that the Bank of Japan’s large-scale monetary stimulus should be normalized as soon as possible. According to him, the current version of the financial regulator’s policy violates market principles.

Kazuo Ueda, according to many experts, seeks to gradually abandon the ultra-soft concept of activity introduced by his predecessor Haruhiko Kuroda. Over the past eight months, the Bank of Japan has dealt with some of the side effects of aggressive easing by making adjustments to the YCC program. Against this background, fluctuations in the yield of 10-year government bonds of the Asian country above 1% were recorded.

At Tuesday’s meeting, the Bank of Japan maintained its policy of implementing a soft monetary policy, which provides for setting a short-term target interest rate of minus 0.1%. Also, in this case, it is envisaged to maintain the yield of 10-year government bonds in the range of about 0%.

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