The Bank of Japan may end its negative interest rate policy as early as January and start raising borrowing costs if the economy can withstand the risks from overseas uncertainty, said former central bank governor Eiji Maeda.
Eiji Maeda is the head of the Chibagin Research Institute. He oversaw the Bank of Japan's monetary policy drafting until May 2020.
The Bank of Japan last month revised up its price estimates to project inflation to hit 1.9% in both fiscal 2024 and 2025.
The "unexpectedly large" increase in forecasts means inflation is on track to sustainably reach the Bank of Japan's 2% target, said Maeda. The central bank could revise up its price forecasts again in January, which would allow policymakers to justify pulling short-term interest rates out of negative territory, he said. There is a possibility that the Bank of Japan could lift negative rates as early as next January if it believes inflationary pressures are increasing. Such a policy reversal would push the USDJPY pair down.
The Bank of Japan promised to maintain the current monetary policy until a sustained achievement of the 2% price target becomes evident.
Such neutral interest rates, estimated by the level of inflation expectations and the economy's output gap, will most likely stand somewhere near 2%, said Maeda.
After raising rates to zero from negative territory, the Bank of Japan could raise interest rates gradually in a pace of once every few months with a close eye on economic and price developments," he said. "Given uncertainty about the outlook for the overseas economy, the Bank of Japan will tread slowly and cautiously even as it continues to raise short-term rates."
The USDJPY currency pair is likely to start a downward reversal amid the emerging prospect of the U.S. monetary policy easing. In the next month or two, the statements from the Bank of Japan should be closely monitored.
Overall recommendation is to sell USDJPY provided the Bank of Japan starts to make statements about leaving the negative interest rate zone.
Take profit at 125.000. A stop-loss could be set at 160.000