The Bank of Japan now has a window of opportunity to return interest rates “a little bit closer to normal,” said Izumi Devalier of BofA Global Research.
In the near term, the BoJ could make a one-time policy adjustment to increase interest rates and give “a little bit of flexibility” to the long-term returns of trade, Japan’s chief economist BofA said.
Japan adopted negative interest rates in 2016 in an effort to combat decades of deflation by encouraging borrowing and spending. But the Bank of Japan has struggled for years to meet its elusive inflation target, preventing the central bank from raising interest rates to normal levels.
But Bank of America expects the BoJ to end its negative interest rate policy at its October meeting and move the target 10-year yield ceiling to 0.5% from 0.25% currently.
“The focus in the near term will be more on growth risks, and then if we get a stabilization, I think we can make that move later in the year,” Devalier added.
Devalier explained that the main reason the BoJ is able to take the next step towards normalization is the inflation situation in Japan.
under the ruler [Haruhiko] “I think the risks of de-inflation or deflation have receded,” Kuroda said. “Now, companies may not raise prices aggressively, but they are unlikely to have to cut in the face of weak demand or a shock to the foreign exchange market.”
While many economies struggle with rising inflation, consumer prices have remained relatively stagnant in Japan for years. Fading inflation or deflation stifles wages and corporate investment, which in turn limits economic growth.
She said the supportive deflation risks are a “paradigm shift” for Japan, adding that the country may be heading toward a sustainable 1% inflation level.
‘The new government under [Prime Minister Fumio] Kishida is also less supportive of deflation, or strong easing of the Bank of Japan in particular at any cost.”
“However, the Bank of Japan will remain very cautious, especially with developments across Ukraine, and downside risks to the global economy from development,” Devalere said.
With oil prices rising, she said this could mean “upside risks to Japan’s inflation outlook and downside risks to growth”. She noted that Japan is a net energy importer, with the majority of its crude oil coming from the Middle East and Russia.
“Rising energy prices, especially if driven by a supply-side shock, would be a headwind for growth,” DeVallier said.