The Bank of Japan (BOJ) announced on Tuesday it was ending its negative interest rate policy, raising its benchmark interest rate for the first time in 17 years. The decision marks a formal shift away from the central bank’s long-standing monetary easing program, which officials linked to signs that sustainable inflation and wage growth are taking hold in the Japanese economy.
In a policy statement released after its two-day meeting, the BOJ’s board voted to set the new overnight call rate, its primary policy tool, in a range of 0% to 0.1%. This replaces the previous rate of -0.1%, which had been in place since 2016 to combat persistent deflation.
Alongside the rate hike, the central bank also announced the discontinuation of its yield curve control (YCC) program, which managed long-term interest rates by purchasing large quantities of government bonds. Furthermore, the BOJ will cease its purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs).
At a press conference following the announcement, BOJ Governor Kazuo Ueda explained the rationale behind the policy change. He stated that the bank’s 2% inflation target was “in sight” of being achieved in a sustainable and stable manner. Ueda pointed to the results of recent annual wage negotiations between major unions and companies, which yielded the largest pay increases in over three decades, as a key factor supporting the board’s decision.
“We judged that a virtuous cycle of wages and prices has become solid,” Ueda told reporters. He added that while the bank was ending its extraordinary easing framework, financial conditions are expected to remain accommodative for the time being.
The move was widely anticipated by financial markets. Deputy Governor Shinichi Uchida had previously indicated that the conditions for a policy adjustment were falling into place. In public comments made in the weeks leading up to the decision, Uchida noted that the outcome of the spring wage talks would be crucial for determining if inflation could be sustained.
Following Tuesday’s announcement, the Japanese yen weakened against the U.S. dollar, and Japan’s Nikkei 225 stock index closed higher. The BOJ stated it would continue to purchase Japanese government bonds at roughly the same pace as before to prevent any abrupt rises in long-term yields. The bank’s statement affirmed that it will respond to economic and price developments as it guides future monetary policy.
