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A pedestrian walks past the Bank of Japan building in Tokyo.
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Japan has ended its negative interest rate policy, marking a historic shift away from an aggressive monetary easing program implemented years ago to combat chronic deflation.
As part of the decision, the Bank of Japan (BOJ) raised interest rates for the first time in 17 years, raising its short-term rate to “around zero to 0.1%” from -0.1%, according to a statement posted on its website on Tuesday.
The BOJ has battled deflation and economic stagnation since the late 1990s. Over the years, it has tried to encourage rising prices by using a combination of conventional and unconventional monetary policies, including interest rates. zero or negative interest rates and large-scale asset purchases.
“Japan’s economy has recovered moderately, although some weakness has been observed,” he said in Tuesday’s statement.
Recent data and anecdotal information have shown that the virtuous cycle between wages and prices has become “more robust.” he added.
As inflation rose and interest rates elsewhere rose, pressure had increased on the BOJ to reduce its negative interest rate policy (NIRP).
Last week, major unions and companies, including Toyota (M.T.), announced better-than-expected salary increases. Central bankers had said they wanted to see solid wage growth before they could begin to normalize interest rates.
Although small, the historic interest rate hike was the first since 2007. Until Tuesday, the BOJ had been the last central bank in the world to employ negative interest rates.
“The Bank of Japan today ended an era of exceptional monetary policy accommodation,” Morgan Stanley analysts said in a research note on Tuesday. “This can be characterized as a virtuous cycle of increasing nominal GDP growth, wages, prices and corporate profits.”
As part of its exit from the NIRP, the BOJ also announced that it would abandon its yield curve control (YCC) policy, which was introduced in 2016 to keep the 10-year Japanese government bond yield around 0%. to maintain accommodative financial conditions.
Meanwhile, it would end purchases of exchange-traded funds and Japanese real estate investment trusts (J-REITs).
The Japanese benchmark Nikkei 225 fluctuated during the trading day. It reversed morning losses to rise after the rate hike news and then fell back into negative territory. It closed with an increase of 0.7%.
The broader Topix index finished up 1.1%.
The Japanese economy will continue to grow at a pace “above its potential growth rate” as a virtuous cycle from income to spending gradually intensifies, the BOJ said in the statement.
The inflation rate in the country is also likely to be above 2% until fiscal year 2024, he said.
However, it pledged to continue buying long-term government bonds. to “more or less the same amount” as before, and indicated that financial conditions will remain accommodative “for the time being.”
Accommodative is a term used to describe monetary policy that adjusts to adverse market conditions and generally involves keeping interest rates low to stimulate growth and employment.
That suggests the BOJ will not embark on an aggressive tightening cycle like other major central banks, such as the United States, have undertaken in recent years to control inflation.
“There are extremely high uncertainties surrounding Japan’s economic activity and prices,” the BOJ said, adding that risks include developments in foreign economies, commodity prices and companies’ wage-setting behavior. national.
“Under these circumstances, it is necessary to pay due attention to developments in financial and currency markets and their impact on economic activity and prices in Japan,” he added.
The Japanese yen weakened following the BOJ’s action. It fell 1% to 150.69 per US dollar on Tuesday night.
Analysts said the BOJ’s move could have been priced in by stock and currency markets.
“Our economists and consensus expected policy normalization,” Morgan Stanley analysts said.
Going forward, analysts at Capital Economics say they don’t think the BOJ will raise its policy rate further.
“We suspect that wage growth among smaller companies will not be as strong as among companies participating in Shunto (wage negotiations),” they said in a research report on Tuesday.
“With wage growth peaking this year, we still expect inflation to fall below the BOJ’s target by the end of the year, so the bank will not feel the need to raise its policy rate further.”
This story has been updated with additional information.