Photo/Illutration The Bank of Japan head office in Tokyo's Chuo Ward (Asahi Shimbun file photo)

The Bank of Japan may exit negative interest rates as soon as March if this year's wage negotiations result in bumper pay hikes exceeding 4%, former central bank board member Makoto Sakurai said on Thursday.

BOJ Governor Kazuo Ueda has said this year's annual wage talks, which set pay for 2025, will be a key factor in deciding when to phase out the bank's massive monetary stimulus.

Big firms will settle wage talks with unions on March 13, which precedes a BOJ policy meeting on March 18-19. Economists project hikes of about 3.9% on average, exceeding a 3.58% pay rise deal struck in 2023 that was the highest in three decades.

"The BOJ appears to be fully prepared for an exit. It's just a question on when Governor Ueda makes the call," Sakurai told Reuters in an interview.

"There's a chance big firms' wage talks may result in pay increases exceeding 4%, which could prompt the BOJ to pull the trigger in March," he said, adding there was an equal chance it may wait until April.

Sources have told Reuters the BOJ is on track to end negative interest rates in the coming months on growing signs that companies will offer bumper pay amid a tightening job market.

A Reuters poll showed more than 80% of economists expect the BOJ to pull short-term interest rates out of negative territory in April. A small number of economists expect action in March.

The BOJ has kept interest rates at ultra-low levels even as other major central banks tightened monetary policy aggressively since late 2022 to combat surging inflation.

An exit from negative rates, which was put in place in 2016, would alter the BOJ's status as a dovish outlier among global central banks, and could trigger shifts in global market flows.

EXCESSIVE STIMULUS

Sakurai, who retains close ties with incumbent policymakers, said an end to negative rates likely won't hurt the economy much as inflation-adjusted borrowing costs will remain very low.

"Japan's real interest rates are abnormally low compared with those of other advanced nations. The BOJ must thus scale back what has become an excessive degree of stimulus," he said.

After raising short-term rates from minus 0.1% to zero, the BOJ will likely move very gradually and allow short-term rates to rise to around 0.5% over the course of several years, he said.

The BOJ is also expected to allow long-term rates to rise to around 1.5%-2.0% in three to four years, he said.

"The BOJ will soon end negative rates but keep monetary conditions accommodative for several years, thereby giving the government time to pursue structural reforms," Sakurai said.

Under yield curve control (YCC), the BOJ currently sets a 0% target for the 10-year government bond yield and allows it to rise to around 1%. The benchmark 10-year yield stood at 0.725% on Thursday.

During his five-year term at the BOJ board that ended in 2021, Sakurai was involved in the adoption of the YCC in 2016. He remains well-versed in economic policy and rightly predicted the BOJ's tweak to the YCC in October 2023.

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