Interest rate hikes are back on the radar at the Bank of Japan, for the first time in a decade, as the U.S. Federal Reserve’s tightening cycle pushes global bond yields higher, heralding a new era for central banks retreating from post-crisis stimulus.
With inflation stubbornly adrift of its 2 percent target, and having just revamped its policy framework, the BOJ is in no rush to raise its 10-year bond yield target, and sees any talk of such a move as hypothetical and more a long-term option.
But the central bank is more open to discussing the idea and may contemplate raising the target as early as next year – if long-term rates keep rising, reflecting clear improvements in the economy, say people familiar with the bank’s thinking.
“The BOJ’s focus next year may not be about whether to ease more but to possibly raise its yield target,” said one of those people, adding that a small hike next year cannot be ruled out.
“There’s a possibility the BOJ could lift the target before inflation hits 2 percent,” another person said, adding, though, that the threshold for doing so would be “quite high”.
While any BOJ rate hike would be some way off, it would underscore a shift in global central banking as the Fed and the European Central Bank gradually wind down their extraordinary stimulus plans deployed after the 2008 global financial crisis.
It would also be a landmark shift in the BOJ’s prolonged battle with deflation. The last time it tightened policy was in 2007, when it raised its short-term rate target to 0.5 percent after ending a previous spell of quantitative easing.
Under a new policy framework adopted in September, the BOJ pledged to guide short-term rates to minus 0.1 percent and the 10-year Japanese government bond yield around zero percent.
The BOJ sees no need to raise the targets for now and has stressed that its priority is to cap 10-year yields around the target via huge bond purchases.