BOJ: Time to exit NIRP?

Upside risks to 2Y JGB yields on BOJ’s NIRP comment.
Group Research, Ma Tieying, Eugene Leow12 Sep 2023
    Photo credit: Unsplash/Adobe Stock Photo

    During a recent interview, Bank of Japan Governor Kazuo Ueda expressed that lifting the negative interest rate policy (NIRP) is an option for policy normalization, contingent upon the central bank's confidence in achieving sustainable price increases along with rising wages. He also mentioned the possibility that the central bank could gather enough information by the end of this year to consider lifting NIRP.

    Ueda's remarks suggest an increased likelihood that the BOJ may opt to end NIRP before abandoning YCC. NIRP was implemented in January 2016, followed by the introduction of YCC in September 2016. Market participants have generally anticipated that YCC would be ended first. This is not considered an immediate priority at present, given that the 10Y JGB yield remains below the 1% threshold tolerated by the BOJ following the recent policy adjustments in July.

    The challenge with ending NIRP lies in the potential interpretation by investors as a tightening of monetary policy. If the BOJ chooses this path, it may need to proceed cautiously, such as raising the short-term policy rate modestly by 10bps from -0.1% to 0%, while emphasizing that the goal is to enhance the sustainability of the YCC framework.

    Regarding the timing, the outlook for ending NIRP by end-2023 remains uncertain. Recent wage data has been disappointing, with total wages slowing down to 1.2% YoY in July from over 2% in May-June, and base wages remaining at 1.5%. Tokyo's CPI also eased to 2.9% in August from 3.2% in July. Ueda’s reference to forward-looking information probably pertains to the 2024 wage hike target set by Rengo at end-2023. In the previous December, Rengo demanded a 5% wage hike for the current year's Shunto. The actual wage hike announced in July was 3.58%, resulting in a 1-2% increase in macro wage indicators. Given the tendency for actual macro wage data to fall short of expectations, it remains uncertain whether Rengo's wage target this December will provide sufficient insights into next year's wage/price outlook.

    From a market perspective, while there was no commitment from the BOJ (still eyeing wage growth), the fact that end-year is put up as a possible point where the central bank may have sufficient information to decide when to pull back easing even more is notable. The BOJ has been notably glacial in its normalization in the cycle. YCC has not been abandoned but the cap on 10Y yields has since been raised to 1%. Against this theoretical backdrop, we see 10Y yields drifting towards 0.9% (10Y yields briefly touched 0.7% yesterday), however, the path would likely be smoothed by BOJ bond buying (or loans). Thus far, this has been playing out and will likely continue to do so. The shift, in our view, lies with the intermediate tenors. Short-term JPY rates have been floored near zero for an extended period. Even during the pre-GFC global hike cycle, the 3M Tibor stayed below 1%. Even if not the base case for the immediate one year, a lot of communication and re-pricing would need to be done before the BOJ pulls the trigger. 5Y yields have spiked close to 0.3% from 0.07% in mid-year. Similarly, 2Y yields (which are more sensitive to imminent policy shifts) have spiked to 0.05%. These yield levels look high by recent standards, however, if a prolonged policy normalization is underway, perhaps starting with a shift on the policy balance rate towards zero (from -0.1% currently), belly tenors yields will also see considerable upward pressures. We note upside risks to our 2Y JGB forecasts.  

    Ma Tieying 馬鐵英, CFA

    Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣


    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates)

    The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

    This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

    This report has been prepared by a personnel of DBS Bank Ltd who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).  This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited.

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

    DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.