The Bank of Japan is likely to be encouraged by stronger annual wage negotiation results that will pave the way for the end of its negative interest rate by this spring, according to a former BOJ executive director in charge of monetary policy.

"There’s a good chance the outcome of spring wage talks will be higher than last year, reaching 4%,” Eiji Maeda, the former director, said in an interview. That’s because the positive price mechanism the central bank has been seeking to confirm is already in operation, he added. "A virtuous cycle between wages and inflation is already in place.”

Market participants are monitoring the annual wage talks closely as they may be a decisive factor in prompting the BOJ to end the world’s last negative rate. That’s one of the main reasons a majority of BOJ observers predicts the central bank will wait until April before raising rates for the first time since 2007.

Maeda expects this year’s talks to result in pledges to increase wages at a pace that exceeds last year’s 3.58%, on the back of record corporate profits and a tighter labor market. If wages rise by 4%, as Maeda predicts, it would mark the steepest gain since 1992. Initial results from Rengo, Japan’s largest labor union federation, are due on March 15, just before the BOJ meeting in March.

Maeda, currently president of Chibagin Research Institute, left the central bank in 2020 after playing a major role in designing the BOJ’s initial policy response to the pandemic.

Gov. Kazuo Ueda has defended maintaining the BOJ’s ultraloose monetary policy as he awaits further data that might show whether inflation will persist. The bank has said it will scrap the negative rate when it becomes sufficiently certain of achieving sustainable inflation of 2%.

Maeda said that while he can understand this cautious approach, he takes a different view. From his perspective, the negative rate should be ended once there’s no concern over a potential return to falling prices, rather than waiting for full attainment of the BOJ’s price goal.

"The introduction of the negative rate wasn’t the same as cutting rates at levels that are still above zero,” he said. "If there is little chance of the economy returning to deflation, the abnormal policy should be abandoned.”

Maeda refrained from naming a specific month as the potential timing for the BOJ’s first rate hike since 2007, instead predicting the action by spring. In doing so he indicated the likelihood of a move in April without ruling out action at an earlier time.

When the bank does lift its current measures, it will probably take steps to avoid a sudden surge in bond yields, he said. It’s unclear whether the BOJ would call such action yield curve control or if it would ditch the YCC program and merely pledge to keep buying bonds.

Maeda, also a former BOJ chief economist, said theoretically it could be argued that 2% is a natural terminal rate for Japan, but that it’s hard to say that would be the BOJ’s destination, as the nation’s short-term rate hasn’t exceeded 0.5% since 1995.

"You can’t analyze what will happen when the rate exceeds 0.5%, as that would be a world that no one knows,” Maeda said. "In a post-negative rate era, the BOJ will determine the pace and level of the policy rate by examining whatever the reality is.”