The Bank of Japan (BOJ) made a significant decision on Tuesday, marking a pivotal moment in its monetary policy. After eight years of implementing negative interest rates and other unconventional measures, the BOJ announced the end of its radical approach, signaling a departure from its longstanding strategy of stimulating growth through massive monetary stimulus.
This move represents Japan’s first interest rate hike in 17 years, although interest rates remain near zero due to the country’s delicate economic recovery. Analysts suggest that the BOJ is proceeding cautiously with any further increases in borrowing costs.
Japan now stands as the final major central bank to exit the era of negative interest rates, marking the conclusion of a global trend where policymakers relied on cheap money and unconventional tools to bolster economic growth.
Frederic Neumann, chief Asia economist at HSBC in Hong Kong, commented on the significance of this shift, stating, “The BOJ today took its first, tentative step towards policy normalization. The elimination of negative interest rates in particular signals the BOJ’s confidence that Japan has emerged from the grip of deflation.”
As anticipated, the BOJ abandoned its policy of charging a 0.1% fee on certain excess reserves held by financial institutions since 2016. Instead, the central bank introduced the overnight call rate as its new policy rate, aiming to maintain it within a range of 0-0.1% by offering a 0.1% interest on deposits at the central bank.
Furthermore, the BOJ decided to discontinue yield curve control (YCC), a policy implemented since 2016 to cap long-term interest rates at zero. However, the central bank remains committed to purchasing government bonds at a similar pace and stands ready to increase purchases if bond yields rise sharply.
In explaining the decision to dismantle former Governor Haruhiko Kuroda’s massive stimulus program, the BOJ stated,
“We judged that sustainable, stable achievement of our price target came in sight.”
The market had been anticipating an end to negative interest rates, given that inflation has exceeded the BOJ’s 2% target for over a year. However, the central bank emphasized that accommodative financial conditions would persist for the foreseeable future, indicating a cautious approach to future rate hikes.
The yen experienced volatility following the announcement, dropping to nearly 150 per dollar, as investors interpreted the BOJ’s guidance as a signal that the interest rate gap between Japan and the United States may not narrow significantly.
Attention now turns to Governor Kazuo Ueda’s post-meeting news conference for insights into the pace of future rate hikes. The stakes are high, as a surge in bond yields could escalate Japan’s already substantial public debt burden, which is double the size of its economy.
Moreover, the end of Japan’s era of cheap funds could have reverberations in global financial markets as Japanese investors repatriate funds back to their home country from overseas investments.
Under former Governor Kuroda’s leadership, the BOJ initiated a large-scale asset-buying program in 2013 to stimulate inflation to a 2% target within a two-year timeframe. Subsequently, negative interest rates and YCC were introduced in 2016 to adapt the stimulus program to changing economic conditions.
However, amid concerns over the yen’s depreciation and the adverse effects of ultra-low interest rates, the BOJ adjusted its YCC policy last year to loosen its grip on long-term rates.
The BOJ’s decision to end negative interest rates marks a significant shift in Japan’s monetary policy, signaling the central bank’s confidence in the country’s economic outlook while acknowledging the need for cautious adjustments to support continued growth.
