2024-03-19 12:46:36
Bank of Japan
The Bank of Japan, on Tuesday, raised its key interest rate, putting an end to the negative interest rate policy that was the last central bank in the world to adopt, based on a recent increase in wages recorded in the country.
The Bank of Japan has been adopting negative interest rates since 2016 with the aim of supporting economic activity and encouraging inflation, which has remained weak for a long time in Japan.
Economist Tom Kenny commented in a note to ANZ Bank that it is a “new era” for the Bank of Japan, which has been following a very accommodating policy since 2013.
Given the “more robust” dynamic between wages and inflation in Japan, the central bank decided to adopt an interest rate for short-term loans ranging between zero and 0.1 percent, compared to -0.1 percent to zero percent previously.
The bank explained that this main interest rate for interbank loans on a daily basis will, from now on, be its “main tool.”
“It will be normal monetary policy,” Bank Governor Kazuo Ueda said on Tuesday during a press conference in Tokyo.
But he added that, given the current expectations regarding economic activity and prices in Japan, a “rapid pace” of interest rate increases would be avoided, stressing the need to maintain “favorable” financial conditions at the present time.
This phase is expected to continue for a long time, as the Central Bank believes that its goal of reaching an inflation rate of 2 percent will be achieved at the end of the period of its latest macroeconomic forecasts issued in January, which means that it will continue until 2025-2026 at the earliest.
Continue buying bonds
On Tuesday, the central bank also stopped working on a tool to adjust the yield curve on Japanese bonds, which aimed to keep these ten-year bond yields near zero percent.
In fact, this controversial tool, which causes disruption in the bond market, has not been used in practice since last year, as the Central Bank gave it increased flexibility and has been accepting since the end of last October to exceed a “reference” ceiling of 1 percent for returns over ten years.
However, the corporation intends to continue purchasing Japanese public bonds “at approximately the same proportions” to maintain its ability to move effectively in the event of a “rapid increase” in long-term yields.
The volume of bond purchases by the Bank of Japan currently amounts to regarding six billion yen per month (regarding 37 billion euros).
On the other hand, the central bank will stop its programs to purchase other financial assets from exchange-traded investment funds and joint Japanese real estate funds, and it will also “gradually limit” the purchases of corporate debt securities until stopping them “by regarding a year.”
The Tokyo Stock Exchange is reassuring, but the yen is declining
This shift in the central bank’s monetary policy did not surprise financial markets, especially following Friday’s preliminary results of annual wage negotiations, which led to a record wage increase in Japan since 1991.
Ueda acknowledged Tuesday that these results “were an important factor” in starting a return to normal monetary policy.
This was the pivotal factor that the central bank was waiting for to start changing its direction, regarding two years following it began a significant tightening of borrowing conditions in the United States and Europe under the influence of severe inflationary pressure.
Japan, in turn, has been recording inflation since 2022 with the rise in energy prices in the wake of the Russian invasion of Ukraine, which made the country exceed the 2 percent threshold set by the Central Bank as a target.
But domestic demand and economic growth remain weak in Japan, making it difficult to keep inflation permanently below this level.
As a result of the central bank’s decisions and its lenient tone, the Nikkei Index, the main index on the Tokyo Stock Exchange, recovered, recovering from its losses and closing with an increase of 0.66 percent.
However, the yen recorded a significant decline once morest the dollar, reaching 1.02 percent, as the dollar’s trading price reached 150.69 yen at 9.55 GMT, compared to regarding 149.3 yen to the dollar before the central bank’s announcement.
By making room for better returns on bank deposits and investments in Japan, this positive key interest rate might ultimately boost households’ purchasing power and encourage economic growth, explained Sharu Chanana, a strategist at Saxo Capital Markets.
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