Bank of Japan ends era of negative interest rates

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The Bank of Japan has raised interest rates for the first time since 2007, becoming the world’s last central bank to end negative rates as the country puts decades of deflation behind it.

Following a 7-2 majority vote, the BoJ said it would guide the overnight interest rate to remain in a range of around 0 to 0.1 per cent.

The central bank also removed its yield curve controls, a policy it began in 2016 to reinforce its ultra-loose monetary measures by capping the yields of 10-year Japanese government bonds.

The widely expected move on Tuesday came after workers at some of Japan’s largest companies secured their biggest pay rise since 1991, giving BoJ governor Kazuo Ueda enough confidence that mild inflation will continue.

The BoJ was one of a number of central banks to turn to negative interest rates as a radical policy measure. It introduced negative rates in 2016 as it tried to encourage banks to lend more to generate spending and contain the risks of a global economic slowdown.

The end to one of the most contentious economic experiments of recent times comes as signs emerge of broader change in the Japanese economy.

In February the Nikkei 225 stock index finally surpassed the level reached 34 years ago, while more companies are passing on the costs of inflation to consumers and labour shortages are contributing to higher wages.

Still, the BoJ’s pledge to keep buying Japanese government bonds on Tuesday underscores the continuing weakness in the economy, as household consumption has remained sluggish.

Inflation, which was sparked by a rise in imported energy and food prices, is well beyond its peak. Core inflation, excluding volatile fresh food prices, slowed in January for the third straight month. 

Despite the return to positive interest rates, economists said rates were likely to stay very low for the foreseeable future, and BoJ officials do not see the first rise as a signal that more will quickly follow.

“Given the current outlook for economic activity and prices, the bank anticipates that accommodative financial conditions will be maintained for the time being,” the BoJ said.

As part of the new framework, the BoJ will apply an interest rate of 0.1 per cent to deposits held with the central bank. It will discontinue purchases of exchange traded funds and Japan real estate investment trusts, but said it would continue to buy roughly the same amount of JGBs as it does now — about ¥6tn per month.

Sayuri Shirai, a former BoJ board member who opposed the introduction of negative interest rates, said the BoJ’s decision appeared to be driven more by the feeling that “now is the only time to act”, with uncertainty expected in the months ahead due to US elections as well as a potential change in Japanese premiership.

“The economic conditions are not yet in place. The fact that the BoJ decided to move based on spring wage talks alone shows that they were in a rush to end negative interest rates,” Shirai said.

On Tuesday, the yen edged higher after the announcement but was still 0.4 per cent down against the US dollar at ¥149.74. The Nikkei Stock Average briefly rose after the BoJ decision but was down 0.5 per cent.

Additional reporting by William Sandlund in Hong Kong


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