The Bank of Japan ends the “negative interest rate” policy in a historic shift

2024-03-19 22:02:23

The Bank of Japan has ended its eight-year negative interest rate regime, marking a historic shift away from focusing on reviving growth with massive, decades-long monetary stimulus packages.

Although the move will be the first increase in interest rates in Japan in 17 years, it still keeps interest rates fixed around zero, especially since the fragile economic recovery will force the central bank to slow down any further increase in borrowing costs, analysts say.

The shift makes Japan the latest central bank to exit negative interest rates and ends an era in which policymakers around the world sought to support growth with cheap money and unconventional monetary instruments. In a widely expected decision, the Bank of Japan abandoned a policy that imposed a 0.1 percent fee on some excess reserves held by financial institutions at the central bank.

The bank set the overnight interest rate as, and decided to direct it in a range between 0 and 0.1% by paying 0.1% interest on deposits at the central bank.

In its statement, the central bank stressed the need to pay attention to economic and price movements in Japan, and that “appropriate financial conditions” will continue at the present time.

The Bank of Japan was the last central bank in the world to adopt a negative interest rate following Europe abandoned it in 2022.

A tool to adjust the yield curve of Japanese bonds was suspended.

In practice, this tool, which raises controversy because it is a source of disruption in the Japanese bond market, has been almost unused since last year if the central bank made it more flexible. Since the end of last October, it has accepted exceeding a “reference” ceiling of 1% for the return over ten years.

But the central bank intends to continue purchasing Japanese public bonds “at approximately the same proportions” to continue to respond effectively in the event of a “rapid rise” in long-term yields.

“This will be the first interest rate hike in 17 years, so it has great symbolic importance,” Izumi Devalier, head of Japan economics at Bank of America Securities, said before the Bank of Japan’s monetary policy decision. “But the actual impact on the economy is very small,” she added, noting that the Bank of Japan is likely to maintain its determination to keep monetary conditions easy.

She explained, “We do not expect a significant increase in financing costs or mortgage rates.”

With inflation exceeding the Bank of Japan’s 2 percent target for more than a year, many observers expected the end of negative interest rates in March or April.

The previous monetary policy of the Central Bank of Japan was different from other central banks, which raised interest rates sharply during the past two years to curb inflation resulting from disruption to global supply chains due to the emerging Corona virus pandemic and the Russian-Ukrainian war.

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