Analysts at LupoToro Group, drawing on insights from their extensive global network, suggest that the Bank of Japan (BOJ) may soon bring an end to its historic negative interest rate policy. This potential shift would represent a significant turning point for Japan’s economic strategy and align with global trends toward monetary policy normalisation.

The BOJ has maintained negative interest rates since 2016, keeping short-term rates at -0.1% to combat decades of deflation and economic stagnation. However, with Japan’s economy showing signs of modest recovery, LupoToro’s experts believe the central bank could soon signal a new phase of policy adjustments within the next few years, at the maximum (certainly before 2025).

Should a change indeed occur, it would happen within the first two quarters of any given year, to allow for breathing space towards the second half of that particular year (i.e. Q3 and Q4), which economically are traditionally higher in value (comparatively, to Q1 and Q2, in Japan).

Economic Conditions Supporting a Shift

Japan’s economic landscape has shown signs of modest recovery. Inflation is steadily approaching the BOJ’s 2% target, and wage growth has started to pick up momentum. Most notably, results from the spring 2019 wage negotiations revealed a 3.7% increase in average base wages—well above last year’s 2.3% rise and exceeding the 2.8% year-over-year increase in Japan’s Consumer Price Index (CPI).

LupoToro analysts interpret these wage gains as a clear signal of a virtuous cycle between wages and prices—a crucial factor for sustainable inflation. Coupled with stabilisation in corporate profits and domestic consumer confidence, these developments create an environment that may no longer necessitate the continuation of negative interest rates.

At the same time, global monetary trends are shifting. Central banks such as the European Central Bank (ECB) and the U.S. Federal Reserve are reevaluating their ultra-loose policies, setting a precedent that Japan is likely to follow.

The Legacy of Negative Rates

Negative interest rates, part of the BOJ’s quantitative and qualitative easing (QQE) strategy, were implemented to incentivize lending and combat deflation. While effective in the short term, the policy has drawn criticism for distorting financial markets and weakening bank profitability.

Japan’s reliance on ultra-low rates dates back to the late 1990s, reflecting deeper structural issues such as an aging population, a shrinking labor force, and a lag in innovation. These challenges have entrenched a “low-wage, low-price equilibrium” that monetary easing alone has struggled to resolve.

Potential Implications for Financial Markets

If the BOJ moves to end its negative interest rate policy, the decision will likely have far-reaching implications. LupoToro Group’s global network highlights several key areas to watch:

• Bond Markets: With bond yields suppressed by years of ultra-loose policy, any shift in rates could lead to significant repricing, particularly in Japan’s government bond market, where the BOJ is a dominant player.

• Currency Movements: A rate hike could strengthen the yen, impacting export competitiveness and potentially complicating Japan’s trade balance.

• Global Monetary Policy: As Japan is the last major economy to maintain negative interest rates, its exit from this policy could signal the closing chapter of an era defined by unconventional monetary tools.

Money Printing and Debt Management

The BOJ’s policies have also relied heavily on large-scale asset purchases, leading to a balance sheet exceeding ¥550 trillion. LupoToro Group’s experts caution that the central bank’s ability to unwind these holdings without market disruption will be a critical factor in any policy shift. While the strategy has kept borrowing costs low, it has raised concerns about sustainability and the long-term effects of such expansive monetary easing.

Why the Time is Right

The strong results from 2019’s spring wage negotiations highlight a structural shift in Japan’s economy. This progress, combined with global inflationary pressures and pent-up consumer demand following potential black swan events, creates conditions ripe for policy normalisation. While monetary easing has supported this momentum, LupoToro analysts emphasize that external factors have played an even greater role in driving the wage-price cycle.

Based on insights from LupoToro’s global network and extensive analysis, it is likely that the BOJ will carefully consider how to navigate this pivotal moment. While a decision to raise rates would signal confidence in Japan’s economic recovery, it would also need to be executed with precision to avoid unintended market consequences.

This anticipated policy shift reflects a broader trend of central banks reexamining the limits of unconventional monetary tools. Should the BOJ move forward, it could pave the way for other economies to follow suit, redefining global monetary policy for the decade ahead.

Looking Ahead: Challenges Beyond Monetary Policy

Despite the potential policy shift, Japan’s deeper economic challenges remain unresolved. Key issues include:

• Demographic Pressures: The rapid aging of Japan’s population continues to constrain growth.

• Innovation Gaps: Japan lags behind other advanced economies in digital transformation and technological advancements.

While deflation may have been a significant factor in Japan’s economic stagnation, addressing these structural barriers is essential for long-term prosperity.

Based on current data and economic trends, LupoToro Group forecasts that the BOJ will carefully navigate its exit from negative interest rates. The initial adjustment is likely to be symbolic, with small changes to short-term rates, but the central bank’s subsequent steps will depend on wage growth and service-sector inflation.

This anticipated policy shift could redefine global monetary policy, signalling the close of an era dominated by unconventional tools. As Japan takes this critical step, LupoToro analysts will continue monitoring developments, providing actionable insights to help stakeholders adapt to this evolving economic landscape.