With traders betting that the Bank of Japan will almost certainly end its negative interest rate policy by early next year, focus is shifting to where policymakers see the nation¡¯s ¡°neutral¡± rate.
This theoretical rate that neither stimulates nor restricts the economy is likely somewhere in a wide range of 0.5% to 2%, according to analysts, setting a huge challenge for investors.
Because the neutral rate will guide the BOJ as it normalizes monetary policy, it will also provide a key reference point for market pricing of Japanese bond yields, with implications for investment flows into everything from U.S. Treasuries to bonds from Europe and Australia.
Japan¡¯s overnight index swap curve indicates there is a 20% chance that the BOJ will end negative interest rates by the end of the year, and that possibility rises to 100% by April, according to data compiled by Bloomberg.
Former BOJ research chief Toshitaka Sekine sees the neutral interest rate at 1.8%, reflecting the central bank¡¯s two-year outlook for inflation excluding fresh food and energy prices. A further uptick in 10-year sovereign yields may push up the neutral rate to 2%, he said.
Eiji Maeda, another former director of the BOJ¡¯s Research and Statistics Department, also said the neutral interest rate is around 2%, in an interview with the Nikkei published earlier this month. The central bank may end its negative rate policy by as early as January next year and raise it by 0.25% every six months after that, he was quoted as saying. That means it may reach around 2% in January 2028 if that pace is continued.
Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities, sees the neutral interest rate somewhere in a range of 0.5% to 1.5%. He predicts that the BOJ will begin the normalization process with an eye to raising rates to the lower limit of around 0.5%, a level that may be reached in one year.
Tetsufumi Yamakawa, chief economist at Barclays Securities Japan, says the neutral rate will eventually converge around 1.5%, assuming that Japan¡¯s neutral real interest rate is minus 0.5% and the underlying tone of medium- to long-term consumer price index is at the 2% level. For the time being, the BOJ is likely to gradually guide the short-term policy rate toward 0.5% to 1.0%, he said.
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