Japan’s still negative neutral rate points to a very slow exit from ultra-lax policy by BoJ

The Bank of Japan (BoJ)’s monetary policy has been an outlier among major global central banks. It was not only the last central bank to end the unconventional monetary policy tools but also the first one to actively use those tools from the 90s.With declining neural rate, the BoJ confronted the zero nominal lower bound, a belief that the policy rate cannot fall below 0%, when the economy suffered from a prolonged deflation. In fact, our latest Cross-Expertise* revealed that Japan’s neutral rate remains negative even if much less than in the past, and still the lowest among developed economies (Chart 1). This finding points to how difficult it will be for the BoJ to move beyond zero rates in the months and, possibly, years to come, depending on how the Japanese economy performs, especially whether 2% inflation is really achieved structurally.The secular decline in potential growth rate has been behind Japan’s falling neutral rate. In addition to a shrinking labor force, the total factor productivity has stagnated as companies contained business investments during the prolonged deflationary period. While households’ dissaving and weakening home bias (Chart 2) could raise the neutral rate, our simulation suggests that Japan’s neutral rate is likely to remain low. After all, limited progress in structural reform in the labor market and deregulation is anticipated to contain the potential growth rate.Therefore, the important implication is that the BoJ is expected to keep the monetary policy accommodative and that a rapid exit from such policies does not seem likely so far.