The Bank of Japan will likely end its risky asset purchases but avoid raising interest rates rapidly when scaling back monetary support, Deputy Governor Shinichi Uchida said in the strongest hint to date that an end to its massive stimulus was nearing.
Service-sector prices are rising as more companies hike wages and pass on rising labour costs, Uchida said, signalling his growing conviction that conditions for phasing out stimulus were falling into place.
"If sustainable and stable achievement of our 2% inflation target comes in sight, the large-scale monetary easing will have fulfilled its role and we'll explore whether it should be revised," Uchida said in a closely-watched speech in Nara, western Japan, on Thursday.
Ending negative interest rates, a move markets expect to happen either in March or April, would be equivalent to hiking short-term interest rates by 0.1% percentage point, he said.
"Even if the BOJ were to end our negative interest rate policy, it's hard to imagine a path in which it would then keep raising the interest rate rapidly," Uchida said.
The remarks by Uchida, which were closely watched by markets due to his record of dropping key policy hints, heighten the chance the BOJ will soon pull short-term interest rates out of negative territory.
The yen and Japan's 10-year government bond yield fell, while the Nikkei stock average (.N225) rose after the speech as investors reacted to his remarks ruling out the chance of rapid rate hikes.
Under the BOJ's massive stimulus programme, it guides short-term interest rates at -0.1% and the 10-year government bond yield around 0%. It also buys government bonds and risky assets to pump money into the economy.
Uchida said it would be "natural" for the BOJ to end its purchases of risky assets such as exchange-traded funds (ETF) and trust funds investing in property, once it judges that sustained achievement of 2% inflation is within sight.
He also said the BOJ would not sharply reduce the amount of government bond purchases, and ensure long-term interest rates do not spike abruptly, upon ending its bond yield control.
"If the BOJ does revise the framework, it would incline more toward letting market forces determine interest rates," Uchida said. "In doing so, however, it will take careful measures so as not to create discontinuity before and after the revision."
A career central banker, Uchida has been deeply involved in crafting many elements of the BOJ's massive stimulus programme including negative interest rates and yield curve control (YCC). His views are thus seen as key to the timing and means of dismantling the programme.
The BOJ has been laying the groundwork to end negative rates by April and overhaul other parts of its ultra-loose monetary framework, but is likely to go slow on any subsequent policy tightening amid lingering risks, sources have told Reuters.
