The Bank of Japan puts an end to the era of negative interest rates with the first hike in 17 years

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A pedestrian walks near the Bank of Japan building in Tokyo.

Hong Kong

Japan has ended its negative interest rate policy, marking a historic shift away from the aggressive monetary easing program implemented years ago to combat chronic deflation.

As part of the decision, it was done Bank of Japan The Bank of Japan raised interest rates for the first time in 17 years, raising the short-term interest rate to “about zero to 0.1%” from negative 0.1%, according to a statement posted on its website on Tuesday.

The Bank of Japan has been battling deflation and economic stagnation since the late 1990s. Over the years, the ECB has sought to encourage prices to rise using a mix of conventional and unconventional monetary policies, including zero or negative interest rates and large-scale asset purchases.

“The Japanese economy has recovered moderately, although some weakness has partially emerged,” she said in a statement on Tuesday.

Recent data and anecdotal information have shown that the virtuous circle between wages and prices has become “more solid.” She added.

With inflation rising and interest rates rising elsewhere, pressure has mounted on the Bank of Japan to end its negative interest rate policy (NIRP).

Last week, unions and major companies, including Toyota (TM), announced better-than-expected pay increases. Central bankers have been saying they want to see strong wage growth before they can start normalizing interest rates.

Although small in size, the rise in interest rates was the first since 2007. Until Tuesday, the Bank of Japan was the last central bank in the world to use negative interest rates.

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“Today the Bank of Japan ended an era of extraordinary monetary easing,” Morgan Stanley analysts said Tuesday in a research note. “This can be described as a virtuous cycle of rising growth in nominal GDP, wages, prices and corporate profits.”

As part of its exit from the NIRP, the Bank of Japan also announced that it would abandon its yield curve control (YCC) policy, which was introduced in 2016 to keep the yield on 10-year Japanese government bonds at around 0% to maintain accommodative financial conditions.

At the same time, it will end its purchases of exchange-traded funds and Japanese real estate investment trusts (J-REITs).

Japan's benchmark Nikkei 225 index fluctuated during the trading day. It reversed morning losses to rise on interest rate hike news, then slid into negative territory again. It closed at an increase of 0.7%.

The broader Topix index closed 1.1% higher.

The Bank of Japan said in the statement that the Japanese economy will continue to grow at a pace “above its potential growth rate,” with the virtuous cycle from income to spending gradually intensifying.

The country's inflation rate is also likely to exceed 2% until fiscal 2024.

However, it pledged to continue buying long-term government bonds “Pretty much the same amount” as before, and he noted that financial conditions will remain accommodating “for the time being.”

Accommodative is a term used to describe monetary policy that adjusts to adverse market conditions and usually involves keeping interest rates low to stimulate growth and employment.

This suggests that the Bank of Japan will not embark on an aggressive tightening cycle of the kind that other major central banks, such as the United States, have engaged in in recent years to control inflation.

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“There is too much uncertainty surrounding economic activity and prices in Japan,” the Bank of Japan said, adding that risks include developments in external economies, commodity prices and the wage-setting behavior of domestic companies.

“Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices,” she added.

The Japanese yen weakened after the Bank of Japan's move. It fell 1% to $150.69 by Tuesday evening.

Analysts said the Bank of Japan's move may have been priced in by stock and currency markets.

“Policy normalization was expected before [our] “Economists and consensus,” Morgan Stanley analysts said.

Going forward, analysts from Capital Economics say they do not believe the Bank of Japan will raise interest rates further.

“We believe that wage growth among small businesses will not be quite as strong as among those companies participating in Shinto [wage negotiations]They said in a research report on Tuesday.

“With wage growth peaking this year, we still expect inflation to fall below the BOJ’s target by the end of the year, so the bank will not feel the need to raise interest rates further.”

This story has been updated with additional information.

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