Tuesday, May 21, 2024

Goldman Sachs Forecasts Historic Interest Rate Hike from Bank of Japan After 17 Years

In a turn of events capable of shaking the global monetary landscape, Goldman Sachs predicts that the Bank of Japan (BoJ) is primed to lift its interest rates for the first time in 17 years during this week’s March meeting. 

The American multinational investment bank hastened its forecast from April due to robust wage negotiation outcomes and whispers of a shift away from negative rates from the Japanese banking sector.

From Negative to Positive: A Move on the Horizon

Goldman Sach
Credits: DepositPhotos

Goldman Sachs senior Japan economist, Tomohiro Ota, points to stronger-than-expected salary increases from annual wage negotiations known as “shunto,” and subsequent Japanese press hints toward an end to negative rates, as the key levers likely to prompt this unexpected shift. 

“The BOJ has not sent any signal denying the news so far,” Ota wrote in a Monday note.

The anticipation of a rate hike in March rather than the previously expected April move has started to ripple among economic circles, as the year’s salary negotiations indicate a buoyant economic landscape that seems favorable for a policy shift.

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Economic Tools to be Abandoned, Not Forgotten

Interestingly, Ota anticipates that the BOJ might dismantle its yield curve control policy, a strategic maneuver that targets long-term interest rates through bond purchases and sales as required. 

Notwithstanding, he doesn’t expect a pledge from the central bank on the volume of its Japanese Government Bond purchases or the discontinuation of its ETF acquisitions.

Reflecting on the potential policy change, Ota added, “The overshooting commitment, by which the BOJ commits to increasing the monetary base, is likely to be abolished as well.”

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Tapping Into A Virtuous Economic Spiral

Credits: DepositPhotos

Another crucial aspect on the table is the correlation between higher wages and sustainable price increases. Kazuo Ueda, BOJ Governor, holds the view that higher wages could spur a virtuous spiral leading to inflation driven by domestic demand. 

This notion is grounded in the news from Japan’s largest federation of trade unions, Rengo, which announced last Friday an average wage rise of 5.28% in fiscal year 2024 for workers at the country’s largest firms.

If the BoJ indeed jettisons the world’s remaining negative rate regime, it would act as a swan song to its long-standing monetary policy experiment aimed at alleviating the world’s fourth-largest economy from deflation. 

The ripple effects of this monumental shift are certain to be felt across global markets, reminding us that in the complex dance of global finance, even the whispers of a shift can cause a flutter.

Never one to be left in the dust of speculation, Goldman Sachs has thrown its hat into the ring ahead of time, signaling what could become a seismic shift in Japan’s monetary policy. 

The world must now wait to see how the Bank of Japan plays its hand.

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