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How the BOJ's strategy to smoothly transition away from negative interest rates failed

In brief
Inflation and poor data prompted BOJ to examine two options.
Different deputy governors make the departure process more difficult.Japan's transition to a negative rate represents a turning point.BOJ will probably maintain interest rates close to zero for some time.March 20, Tokyo (Reuters) - On a cloudy December day, when Governor Kazuo Ueda and two deputies convened at the bank's Tokyo headquarters, the Bank of Japan's plan for a smooth transition away from years of huge stimulus came apart.The central bank's goal to stop zero interest rates by March or April and swiftly implement additional hikes was made more difficult by the fact that inflation was slowing down more than anticipated. The officials thought about two options. The first choice was to proceed as scheduled while watching for indications ofeconomic improvement. The other option was to stop negative rates but postpone further rises.

In the end, the MIT-trained Ueda chose the second alternative, which allowed Japan to give up its status as the only nation with negative interest rates. However, this decision prevented Japan from reaching its desired normalization and left it with years of nearly zero rates, which put pressure on the already vulnerable yen.

AZ

One source familiar with the discussions said, "With the economy lacking momentum, there was a growing feeling within the BOJ that inflation might not stay around 2% that long," referring to the central bank's main goal of 2%.
"The BOJ leadership probably realised that time was running short, if they wanted to end negative rates."

AZ


In addition, disagreements between Ueda's two deputies and the governor's indecisiveness on the departure date clouded the choice. Reuters reports for the first time on the two initiatives' existence as well as more information regarding the discussions.


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