On a cloudy day in December, Governor Kazuo Ueda and two deputies gathered at the headquarters of the Bank of Japan in Tokyo. This was the moment when the Bank of Japan’s strategy for an orderly withdrawal from years of huge stimulus began to fall apart. The central bank’s intention to remove zero interest rates by March or April and then immediately follow up with further hikes was made more difficult by the fact that inflation was slowing down faster than was anticipated. The officials deliberated about two of the available options. The first choice was to have a wait and see whether there were any indications of economic improvement before proceeding with the plan.
The second proposal was to put a stop to negative interest rates while delaying any further increases. In the end, the MIT-trained Ueda chose the second alternative, which enabled Japan to lose its designation as the last country with negative interest rates. However, this decision did not allow Japan to achieve the normalization that it had hoped for, and it still left Japan facing years of near-zero interest rates that put pressure on the yen, which was already in a difficult position.
“With the economy lacking momentum, there was a growing feeling within the BOJ that inflation might not stay around 2% that long,” said a person who was aware with the debates. This person was referring to the major objective that the bank had set for itself. “The BOJ leadership probably realised that time was running short, if they wanted to end negative rates.”
Additionally, the decision was made more difficult by disagreements between Ueda’s two deputy, as well as by the governor’s indecision regarding the time of the official departure. Reuters is the first news organization to divulge information regarding the existence of the two initiatives, as well as other specifics regarding the current discussions.
