The Bank of Japan Ends Negative Interest Rates After 8 Years
In a historic move, the Bank of Japan has decided to end eight years of negative interest rates and other unorthodox policies, signaling a shift away from massive monetary stimulus aimed at reflating growth, as reported by Reuters.
While this marks Japan’s first interest rate hike in 17 years, rates are still hovering around zero due to a fragile economic recovery, prompting the central bank to proceed cautiously with any further increases in borrowing costs, analysts believe.
Japan’s Move Marks the Last Exit From Negative Rates
Japan’s decision to end negative rates makes it the final central bank to do so, marking the end of an era where policymakers worldwide relied on cheap money and unconventional tools to stimulate growth.
According to Frederic Neumann, chief Asia economist at HSBC in Hong Kong, this move signifies the BOJ’s confidence in Japan’s ability to break free from deflation and marks the beginning of policy normalization.
Key Changes in BOJ’s Policy
The BOJ has abandoned the policy of charging a 0.1 percent fee on excess reserves, opting instead to set the overnight call rate as the new policy rate in a range of 0-0.1 percent. Additionally, yield curve control has been discontinued, with the central bank now focusing on maintaining accommodative financial conditions.
The central bank will continue buying government bonds at the same pace and increase purchases if yields rise rapidly. Purchases of risky assets like exchange-traded funds and Japanese real estate investment trusts will also cease.
Market Reaction and Future Expectations
Japanese shares experienced volatility following the announcement, with the yen weakening against the dollar. Investors are now looking to Governor Kazuo Ueda’s post-meeting conference for insights on the pace of future rate hikes.
The potential impact of a spike in bond yields on Japan’s public debt, as well as global financial markets, is a key concern as the world’s last provider of cheap funds transitions to a more normalized policy.
Evolution of BOJ’s Stimulus Program
Under former Governor Haruhiko Kuroda, the BOJ implemented a massive asset-buying program in 2013 to spur inflation to a 2 percent target. Subsequent adjustments, such as negative rates and yield curve control in 2016, aimed to sustainably support economic growth.
As Japan grappled with the consequences of ultra-low interest rates, the BOJ’s strategic shifts reflect a balancing act between stimulating inflation and addressing public concerns over economic stability.