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BOJ’s Uchida Says Hard to See Sharp Hiking Pace Post-Liftoff

(Bloomberg) -- A top Bank of Japan official said it’s hard to see the bank raising its policy rate continuously and rapidly even after the negative interest rate is ended.

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“Even if the bank were to terminate the negative interest rate policy, it is hard to imagine a path in which it would then keep raising the interest rate rapidly,” BOJ Deputy Governor Shinichi Uchida said Thursday in a speech to local business leaders in Nara, western Japan.

He said that after the bank ends the negative rate policy, financial conditions will remain easy, and he foresees any policy moves thereafter as occurring at a gradual pace.

The yen weakened, while yields on benchmark Japanese bonds erased a small gain as Uchida spoke. There was minimal movement of rate hike odds in the swaps market, which inched down to less than 20% next month, while remaining above 70% by April and over 100% by June.

By emphasizing continuity even if and when the bank exits negative rates, Uchida’s comments bolstered prevailing views that Japan’s first rate hike since 2007 is approaching. While he didn’t hint at the likely timing for that move, the attention Uchida devoted to describing post-move market conditions could be seen as supporting the case for a move in coming months.

“Uchida’s speech confirms that the end of the negative rate is just around the corner,” said Hideo Kumano, executive economist at Dai-Ichi Life Research Institute and a former BOJ official. “What Uchida is doing is teaming up with Ueda, who gave some vague ideas on the post-negative rate last month.”

Kumano added that there’s little doubt the board is firmly discussing an exit strategy. “What Uchida says today is probably a base for exit discussions among the board members,” he said.

More than half of the economists surveyed by Bloomberg in January predicted the end of the world’s last negative rate regime would come in April.

The veteran policy maker is considered an influential player on the board, as he works closely with Governor Kazuo Ueda. Uchida was a key player in the introduction of the negative rate and yield curve control program in 2016 after being a key designer of a massive monetary easing program in 2013.

“Given that this large-scale easing has been in place for more than 10 years, regardless of the timing of policy revision, the Bank needs to devise both communication and market operations so as not to create discontinuity in financial markets before and after the revision,” Uchida said.

Read more: Japan’s Wage Data Likely Solid Enough to Keep BOJ on Track

“The Bank would, I think, maintain accommodative financial conditions even if the termination were to take place,” Uchida said.

The deputy governor also warned overseas investors against making too many assumptions about the trajectory of BOJ policy based on their own markets and economies. He said economic calculations for determining appropriate interest rate levels overseas may not work well in Japan, due to price expectations.

“It is a bit difficult to assess the situation in Japan through analogies with Europe and the United States,” Uchida said.

Uchida gave the clearest hint yet regarding the likelihood of stopping the purchase of exchange traded funds and Japan’s real estate investment trust when the bank adjusts policy. The BOJ barely bought ETFs last year, and Uchida said ending purchases wouldn’t affect the market much.

Later, at an afternoon press conference, Uchida said ending the yield curve control program wouldn’t mean an abrupt end to bond purchases by the bank.

“It’s unthinkable that we’d suddenly just stop buying bonds,” he said.

--With assistance from Yumi Teso.

(Adds Uchida comment from press conference)

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