At their October meeting, members of the Bank of Japan (BOJ) discussed the possibility of gradually phasing out their massive stimulus program and laying the groundwork for an eventual exit from ultra-low interest rates. This highlights the central bank’s desire to move away from its decade-long accommodative policy, as the prospects of sustained inflation and wage growth increase.
The BOJ kept its ultra-low interest rate targets unchanged but made some adjustments to the yield curve control (YCC), which is designed to regulate long-term interest rates. While some members saw this as a way to reduce the side-effects of YCC, one board member said it could also help with the “smooth transition to a normalisation” of monetary policy.
Another opinion expressed the view that the prospects of achieving the BOJ’s price target had improved since the July meeting. It was argued that the central bank should start to reduce the degree of monetary easing, and that wage growth in the upcoming base pay negotiations could exceed the previous year’s results.
The BOJ is still more dovish than other central banks, as they believe that cost-push inflation must be replaced by a more demand-driven price rise before stimulus can be reduced. However, the summary of opinions at the October meeting showed that the board is preparing for a future exit by improving bond market liquidity and providing communication that will prepare markets for a world of positive interest rates.