BOJ could be ready to hike, but are the markets?

The Bank of Japan sent one of the strongest signals yet that the end is near for its negative interest rate policy — an event for which the market is underprepared.

The BOJ’s price target is “finally coming into sight” as the nation shakes off the idea that wages and inflation won’t rise, board member Hajime Takata said Thursday.

His comments, which follow remarks from the central bank’s governor last week, pushed the yen and bond yields higher, along with pricing in swaps markets for a rate hike next month. But the moves still leave investors vulnerable to heightened volatility if the central bank acts that soon.

“I feel that March is looking very likely after board member Takata’s speech,” said Tadashi Matsukawa, head of fixed income at PineBridge Investments Japan Co. “Takata’s speech brought the idea of a new policy framework to the forefront, and he also made in-depth comments on wages.”

Traders of overnight indexed swaps — who last year were certain that the central bank would change policy by the March 18-19 meeting — now see the chances around 26%. By contrast, economists who previously considered a move next month as unlikely are now talking about the gathering as a “live” event.

Takata, who is seen as a neutral member of the nine-member board, didn’t offer hints as to when such a move might be made. Seven of 15 Tokyo-based economists contacted by Bloomberg this week said there is a prospect of it happening in March, with three seeing it as almost certain and four judging it as possible.

Overall, the economists still forecast April as the most likely time for a policy shift. OIS price around an 84% chance of a hike by the April gathering.

“Short- and medium-term bond yields don’t seem to be adequately pricing in a move,” said Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management Co. “If negative interest rates are lifted in March, bond yields may jump unexpectedly.”

Naomi Muguruma, chief fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities Co., said that given current pricing in markets, a March hike by the BOJ would likely bring a spike in short-term yields that could flow through to longer-maturity debt as well.

“We need to consider flexible and nimble steps including for an exit, for instance, the end of the yield curve control framework, negative interest rate and what to do with the overshooting commitment,” Takata said.

In a speech in September, Takata twice noted the need for continuing large-scale monetary easing patiently. He made no reference to such needs on Thursday.

The yen strengthened 0.7%, the most in almost a month, as it passed through the psychological level of 150 per dollar.

Speaking at a press conference later in the day, Takata reiterated a message previously conveyed by Governor Kazuo Ueda and Deputy Governor Shinichi Uchida among others that even if the bank ends the negative rate, policy settings would remain accommodative.

“We wouldn’t just keep hiking over and over,” Takata said.

Yields of policy-sensitive two-year Japanese government bonds have been rising, and this week edged up to the highest in more than a decade, indicating changes in some parts of the market. Ten-year debt yields rose as high as 0.725% on Thursday. That’s still well below the 1% level that the BOJ set as a reference point. Yields may break above that threshold if negative rates are ended.