By Yara Abi Farraj

Home Economy Bank of Japan ends eight-year era of negative interest rates in historic policy shift

Bank of Japan ends eight-year era of negative interest rates in historic policy shift

Japan's move marks global departure from decades of stimulus-driven growth strategies

The new policy increases interest rates from -0.1 percent to 0-0.1 percent

Published: Tue 19 Mar 2024, 12:08 PM

The Bank of Japan has announced the end of negative interest rates and other stimulative measures in a historic move from eight years of unconventional monetary policy. This landmark decision marks a significant shift away from the era of low interest rates that characterized efforts to reignite growth in Japan and around the world.

The Bank of Japan raised interest rates for the first time in 17 years today, but still kept the rate close to zero. The new policy increased interest rates from -0.1 percent to 0-0.1 percent partly by paying 0.1 percent interest to deposits at the central bank.

Analysts view this decision as a cautious response to a fragile economic recovery, necessitating a gradual approach to further rate hikes.

Abandoning unconventional tools

Moving away from negative interest rates signifies Japan’s emergence from deflation. In 2016, Japan adopted a policy of applying 0.1 percent charge on some excess reserves of financial institutions at the central bank.

In addition to its new interest rate policy, the Bank of Japan has also abandoned yield curve control (YCC), a policy implemented since 2016 to cap long-term interest rates around zero. This shift marks the culmination of efforts to dismantle former governor Haruhiko Kuroda’s massive stimulus program, signaling a new phase in Japan’s monetary policy landscape.

Furthermore, the Bank of Japan announced that it will keep buying the same amount of government bonds and increase purchases if yields increase rapidly. However, it decided to stop purchasing risky assets such as exchange-traded funds (ETF) and Japanese real estate investment trusts.

For more than a year, inflation in Japan had exceeded the 2 percent target. Hence, the market was expecting an end to negative interest rates either in March or April. Setting market expectations, the Bank of Japan signaled future interest rate hikes being moderate. It also added that it expects to maintain accommodative financial conditions for now.

Read: Türkiye likely to keep interest rate unchanged amid inflationary pressures

Market response

The announcement has spurred volatility in Japanese markets, with investors closely monitoring Governor Kazuo Ueda’s post-meeting news conference for insights into the pace of future rate hikes. The yen’s depreciation to 150.37 per dollar suggests expectations that the interest rate differential between Japan and the US may not narrow significantly.

Moreover, the Bank of Japan’s interest rate decision carries significant implications beyond Japan’s borders. As the last major central bank to exit negative interest rates, it could reverberate across global financial markets. Japanese investors, who sought higher yields overseas, may redirect funds back home, potentially impacting global asset prices.

For more news on economy, click here.