Mar 19 2024: The Bank of Japan (BOJ) made a historic shift on Tuesday by ending eight years of negative interest rates and other unconventional policies, marking its first interest rate hike in 17 years. However, the rates remain near zero due to a cautious approach amid a fragile economic recovery.
BOJ Governor Kazuo Ueda announced the move at a press conference, stating, “We reverted to a normal monetary policy targeting short-term interest rates, as with other central banks.”
The BOJ’s new policy sets the overnight call rate in a range of 0-0.1% by paying 0.1% interest on deposits at the central bank, abandoning the policy of charging a 0.1% fee on certain excess reserves introduced in 2016.
Frederic Neumann, chief Asia economist at HSBC in Hong Kong, commented, “The BOJ today took its first, tentative step towards policy normalisation,” indicating confidence in Japan’s recovery from deflation.
The central bank also ended yield curve control (YCC), which had kept long-term interest rates around zero since 2016, and halted purchases of risky assets. However, it will continue buying government bonds and increase purchases if yields rise rapidly to prevent a spike in borrowing costs.
The BOJ expects “accommodative financial conditions to be maintained for the time being,” signaling a moderate approach to future rate hikes.
Japanese stocks rose, and the yen fell below 150 per dollar, reflecting investors’ interpretation of the BOJ’s dovish guidance that the interest rate differential with the United States won’t narrow significantly.
Commercial banks plan to raise deposit rates for the first time since 2007, anticipating further rate hikes by the BOJ this year. Bart Wakabayashi, State Street Tokyo Branch Manager, noted the impact on households and spending power as the next discussion point.
Under former Governor Haruhiko Kuroda, the BOJ implemented massive asset purchases in 2013 to boost inflation to a 2% target. Negative rates and YCC followed in 2016 as part of a more sustainable stimulus approach.
Despite the shift, the BOJ downgraded its economic assessment, citing consumption weakness and unanchored inflation expectations. Governor Ueda indicated a slower rate hike pace than other central banks based on inflation forecasts and upside price risks.
