The Bank of Japan raised interest rates for the first time in 17 years

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Hong Kong CNN —Japan has ended its negative interest rate policy, marking a historic shift away from an aggressive monetary easing program that was implemented years ago to fight chronic deflation.
As part of the decision, the Bank of Japan (BOJ) raised interest rates for the first time in 17 years, lifting its short-term rate to “around zero to 0.1%” from minus 0.1%, according to a statement posted on its website on Tuesday.
The BOJ has battled deflation and economic stagnation since the late 1990s.
Over the years, it has sought to encourage prices to rise by using a combination of conventional and unconventional monetary policies, including zero or negative interest rates and large-scale asset purchases.
“Japan’s economy has recovered moderately, although some weakness has been seen in part,” it said in the statement Tuesday.
Recent data and anecdotal information have shown that the virtuous cycle between wages and prices has become “more solid,” it added.
As inflation rose and interest rates elsewhere went up, pressure had grown on the BOJ to wind down its negative interest rate policy (NIRP).
Last week, major unions and companies, including Toyota (TM), announced better-than-expected wage hikes.
Central bankers had been saying they wanted to see robust growth in wages before they can start to normalize interest rates.
Though small, the landmark interest rate hike was the first since 2007.
Until Tuesday, the BOJ had been the last central bank in the world to employ negative interest rates.
“The Bank of Japan has today ended an era of exceptional monetary policy accommodation,” Morgan Stanley analysts said Tuesday in a research note.
“This can be characterized as a virtuous cycle of rising nominal GDP growth, wages, prices and corporate profits.”As part of its exit from NIRP, the BOJ 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 around 0% to maintain accommodative financial conditions.
Meanwhile, it would end purchases of exchange-traded funds and Japanese real estate investment trusts (J-REITs).
Japan’s benchmark Nikkei 225 index seesawed during the trading day.
It reversed morning losses to edge higher after the news of the rate hike, and then slipped into negative territory again.
It closed up 0.7%.
The broader Topix index ended 1.1% higher.
No aggressive tighteningThe Japanese economy will continue growing at a pace “above its potential growth rate,” as a virtuous cycle from income to spending gradually intensifies, the BOJ said in the statement.
The inflation rate in the country is also likely to be above 2% through fiscal 2024, it said.
However, it pledged to keep buying long-term government bonds at “broadly the same amount” as before, and indicated that financial conditions will remain accommodative “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 spur growth and employment.
That suggests the BOJ will not embark on an aggressive tightening cycle of the sort that other major central banks, such as the United States, have engaged in in recent years to control inflation.
“There are extremely high uncertainties surrounding Japan’s economic activity and prices,” the BOJ said, adding that the risks include developments in overseas economies, commodity prices and domestic firm’s wage-setting behavior.
“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,” it added.
The Japanese yen weakened after the BOJ’s move.
It slid 1% to 150.69 per US dollar by Tuesday evening.
Analysts said the BOJ’s move might have been priced in by equities and currency markets.
“Policy normalization was expected by [our] economists and consensus,” the Morgan Stanley analysts said.
In future, analysts from Capital Economics say they don’t believe the BOJ will raise its policy rate any further.
“We suspect that wage growth among smaller firms won’t be quite as strong as among those firms participating in the Shunto [wage negotiations],” they said in a research report on Tuesday.
“With wage growth peaking this year, we still expect inflation to fall below the BOJs target by the end of the year so the bank won’t feel the need to lift its policy rate any further.”This story has been updated with additional information.

CNN Hong Kong —.

Japan’s decision to abandon its negative interest rate policy represents a historic departure from the aggressive monetary easing program that was put in place years earlier to combat chronic deflation.

As part of the decision, the Bank of Japan (BOJ) increased interest rates for the first time in 17 years. According to a statement on its website on Tuesday, the BOJ raised its short-term rate from minus 0 point1 percent to “around zero to 0 point1 percent.”.

From the late 1990s onwards, the BOJ has fought deflation and economic stability. It has attempted to stimulate price increases over time by utilizing a mix of traditional and non-conventional monetary policies, such as negative or zero interest rates and significant asset purchases.

The statement released on Tuesday stated, “Japan’s economy has recovered moderately, although some weakness has been seen in part.”.

The positive feedback loop between wages and prices has gotten “more solid,” it continued, based on recent data and anecdotal evidence.

The BOJ was under increasing pressure to end its negative interest rate policy (NIRP) as inflation increased and interest rates elsewhere increased.

A better-than-expected wage hike was announced last week by major unions and corporations, including Toyota (TM). Prior to beginning to normalize interest rates, central bankers had stated that they needed to see strong wage growth.

The historic rate increase was the first since 2007, despite its slight magnitude. The BOJ was the world’s last central bank to use negative interest rates until Tuesday.

In a research note released on Tuesday, Morgan Stanley analysts stated, “The Bank of Japan has today ended an era of exceptional monetary policy accommodation.”. This can be described as a positive cycle of increasing nominal GDP growth, prices, wages, and business profits. “.

In addition to announcing its withdrawal from NIRP, the BOJ said it would also be ending its yield curve control (YCC) program. The YCC program was implemented in 2016 with the goal of maintaining accommodative financial conditions by maintaining the yield on 10-year Japanese government bonds at or below zero percent.

ETF and Japanese real estate investment trust (J-REIT) purchases would cease in the interim.

Throughout the trading day, there were swings in Japan’s benchmark Nikkei 225 index. The news of the rate hike caused it to reverse its morning losses and edge higher, but it soon fell back into negative territory. It ended with a 0.7 percent gain.

At the end, the overall Topix index increased by 0.1 percent.

No forceful constriction.

The BOJ stated in the statement that as a positive cycle from income to spending steadily strengthens, the Japanese economy will continue to grow at a rate “above its potential growth rate.”.

According to the report, the nation’s inflation rate is probably going to be higher than 2 percent through fiscal 2024.

But it promised to continue purchasing long-term government bonds at “roughly the same amount” as previously stated, and it said that “for the time being,” financial conditions will remain favorable. “.

In order to support growth and employment, accommodative monetary policy typically entails maintaining low interest rates in response to unfavorable market conditions.

This implies that in order to contain inflation, the BOJ will not start an aggressive tightening cycle similar to what other major central banks, like the US, have done recently.

The BOJ declared, “There are extremely high uncertainties surrounding Japan’s economic activity and prices,” and listed the risks as movements in foreign economies, commodity prices, and the wage-setting practices of domestic firms.

It further stated, “Given these conditions, it is imperative to give due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices.”.

After the BOJ’s action, the value of the Japanese yen declined. Tuesday night saw a 1% decline to 150 points69 per US dollar.

It was suggested by analysts that the currency and equity markets may have already factored in the BOJ’s move.

“Morgan Stanley analysts stated that policy normalization was anticipated by [our] economists and the committee.”.

It is not anticipated that the BOJ will increase its policy rate in the future, according to Capital Economics analysts.

As stated in a research report released on Tuesday, “We suspect that wage growth among smaller firms won’t be quite as strong as among those firms participating in the Shunto [wage negotiations].”.

The bank won’t feel the need to raise its policy rate further because we still expect inflation to drop below the BOJ’s target by year’s end, even with wage growth having peaked this year. “.

More information has been added to this story.

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