Bank of Japan ends 8-year negative rates era with first hike in 17 years

BOJ ends negative rates: The Bank of Japan has concluded its eight-year period of employing negative interest rates and other unconventional measures on Tuesday, marking a departure from its longstanding strategy of stimulating growth through massive monetary stimulus. This decision signifies Japan's first interest rate hike in 17 years, although rates remain close to zero due to a cautious approach driven by the fragile economic recovery.

End of era

Japan's shift away from negative rates marks the final exit of any central bank from such policies, signalling the end of an era where policymakers globally relied on low-cost money and unconventional tools to support economic growth.

In an anticipated move, the BOJ abandoned its policy of imposing a 0.1 per cent charge on certain excess reserves held by financial institutions since 2016. Instead, it introduced the overnight call rate as its new policy rate, aiming to maintain it within a range of 0-0.1 per cent by paying 0.1 per cent interest on deposits at the central bank.

Minimal economic impact

Its actual impact on the economy is expected to be minimal, with the BOJ likely to continue prioritising loose monetary conditions. Consequently, major rises in funding costs or household mortgage rates are not anticipated.

Given that inflation has surpassed the BOJ's 2 per cent target for an extended period, many market observers had anticipated the end of negative interest rates either in March or April. Now, attention shifts to Governor Kazuo Ueda's remarks in the post-meeting news conference for insights into the pace of future rate hikes.

The stakes are considerable, as a surge in bond yields could elevate the cost of servicing Japan's substantial public debt, which is twice the size of its economy and the largest among advanced economies. Furthermore, the conclusion of Japan's provision of cheap funds could reverberate through global financial markets as Japanese investors repatriate funds back to their home country from overseas investments, seeking higher yields.

BOJ policy evolution

Under the leadership of former Governor Haruhiko Kuroda, the BOJ initiated an extensive asset-buying program in 2013 with the goal of achieving a 2 per cent inflation target within approximately two years. Subsequently, negative rates and yield curve control (YCC) were introduced in 2016 as part of adjustments to the stimulus programme due to subdued inflation. However, in response to public concerns regarding the adverse effects of ultra-low interest rates, the BOJ relaxed its control over long-term rates last year amidst criticism over the yen's depreciation and increased import costs.

(With Reuters Inputs)