The Bank of Japan (BoJ) has finally ended the era of negative interest rates, raising borrowing costs for the first time since 2007 in a historic shift as the country puts decades of deflation behind it.
The BoJ governor brought an end to more than a decade of ultra-loose monetary policy on Tuesday 19 March, abandoning a range of easing measures that were put in place to stimulate Asia’s most advanced economy, and lifted the overnight interest rate to a range of 0 to 0.1% (it was previously -0.1%).
Negative rates helped reduce deflationary threats, but increased costs for the banking system and allowed zombie companies to survive. The policy shift is likely over time to trigger movement in global investment flows and comes as signs emerge of broader change in the Japanese economy.
Workers at Japan’s largest companies have secured their biggest pay rises since 1991, giving the BoJ confidence that mild inflation will continue — a goal that has been central to the bank’s policies for years. More companies are also passing on inflation costs to consumers and labour shortages are contributing to higher wages.
Investors have grown more confident in the economy’s prospects. In February the Nikkei 225 stock index finally surpassed the level reached 34 years ago.
The central bank also removed its yield curve controls, another policy put in place in 2016 to reinforce its massive monetary easing measures by capping the yields of 10-year Japanese government bonds.
The BoJ said it would maintain its policy of buying about ¥6 trillion (AUD40 billion) a month in Japanese government bonds, a pledge that underscores continuing weakness in the economy as household consumption remains sluggish. But it will discontinue purchases of exchange traded funds (ETF) and Japanese real estate investment trusts. While the end to negative interest rates was widely expected, economists had been divided on how far the BoJ would go in scrapping other measures such as yield curve control and ETF purchases.
Japan’s stock market has been on fire over the past 12 months – it is up 45%!
Source: Trading Economics
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