Bank of Japan leads first interest rate hike in 17 years

BoJ interest rates: Breaking the streak of 17 years, during which negative rates were maintained in Japan to boost the economy, Japan's central bank on Tuesday raised its benchmark interest rate. The Bank of Japan’s (BoJ) lending rate for overnight borrowing by banks was raised to a range of 0 to 0.1 per cent from minus 0.1 per cent  at a policy meeting that confirmed expectations of a shift away from ultra-lax monetary policy.

The negative interest rate policy, coupled with other measures to infuse money into the economy and keep borrowing costs low, “have fulfilled their roles,” Bank of Japan Gov. Kazuo Ueda told reporters.

The bank has set an inflation target of 2 per cent  that it used as a benchmark for whether Japan had finally escaped deflationary tendencies. But it had remained cautious about “normalising” monetary policy, or ending negative borrowing rates, even after data showed inflation at about that rate in recent months.

As per Ueda, there was “a positive cycle” of a gradual rise of wages and prices, while stressing that monetary policy will remain easy for some time. Although private sector banks and other financial organisations will make their own decisions about rates, he said did not foresee any drastic rises. The central bank will watch for any big moves in rates, which would cause confusion, Ueda further added. 

“We made the decision because we foresaw stable and continuous 2 per cent inflation,” he added. Harumi Taguchi, principal economist at S&P Global Market Intelligence, said she believes inflation could begin falling below 2% and wage increases may not necessarily lead to robust consumer spending if people choose to save, rather than spend.

“While the bank's decisions will contribute to improving the functioning of financial markets, the impact on the real economy is likely to be limited,” according to analysis by S&P Global Market Intelligence.

Ueda had repeatedly said the central bank would review its negative rate and other easing measures if the 2 percent inflation target was met and was accompanied by wage increases.

The Japanese central bank's policy is quite different from those of the U.S. Federal Reserve and the European Central Bank. Both have been moving to lower interest rates after rapidly raising them to clamp down on inflation.

(With PTI inputs)