End of zero-interest rate policy in sight?

“The BOJ’s most recent assessment of the economy was more upbeat than we had expected, which tends to suggest the bank may indeed be taking some cautious steps forward in terms of preparing markets for a policy shift,” says Dr. Matthew Cairns, senior economist at Economy.com.

Cairns noted that the BOJ has outlined three conditions that will need to be met for the bank to shift its current policy. “Core consumer prices must stop falling at least for a few months, and board members must be sure that prices won’t resume their fall,” he says. “Also, the bank must be confident about the overall strength of the economy.”

JP Morgan’s Kanno believes that a 0.25-percent rate hike could occur in the second half of 2006.

However, other market watchers believe the end of the zero-interest rate policy could take even longer. In the fourth quarter 2005 Global Forex Outlook report, analysts at Ideaglobal wrote, “we do not look for an ending of ZIRP [zero-interest rate policy] during the 12-month forecast horizon and feel that an actual hike can occur in the period of November 2006-May 2007.”