Bank of Japan ends negative interest rate policy as inflation fears loom; raises interest rates after 17 years
Upstox
2 min read • Updated: March 19, 2024, 6:43 PM
Summary
The Bank of Japan decided to raise its short-term interest rate after keeping it negative for nearly two decades to stimulate demand through cheap money. Japan is one of the last countries to exit the negative interest rate policy as inflation and cost of living concerns loom.
The Bank of Japan (BoJ) in its March meeting decided to move away from its negative interest rate policy and hiked its interest rate for the first time in 17 years. The central bank raised its short-term rate to a range of 0 to 0.1% from minus 0.1% on Tuesday, adding that it has set a “price stability target of 2 percent.” It will conduct monetary policy as appropriate, guiding the short-term interest rate as a primary policy tool, it added.
Negative interest rates refer to a radical policy where central banks set interest rates at a negative value. This aims to create a macroeconomic environment where savings cost money and borrowings make more economic sense. Japan is the last country to exit this framework, wherein policymakers tried to discourage savings and bring in growth through cheap money.
This unconventional tool found popularity during the pandemic when governments tried to boost demand to offset the negative impact of lockdowns. The European Central Bank, Switzerland, and Denmark introduced negative interest rates at that time, but since then have changed their tactic to combat a different problem: inflation.
Last week, some of Japan's biggest companies, such as Toyota and Honda, decided to increase wages by 5.28% for 2024, according to a statement from the country's biggest union group, Rengo. The increase in wages is expected to stimulate demand and push prices higher, solidifying BoJ’s inflationary concerns.
The bank also did away with its yield curve control (YCC) policy, which involved buying Japanese government bonds to control interest rates. However, the bank in a statement said, it plans to continue buying long-term bonds as needed.
Japan’s rate hike comes at a time when its peers are now banking on signs of recovery in the macroeconomic environment and are holding on to further increases after aggressive hike campaigns in the past to combat inflation.
Last week, the Reserve Bank of Australia announced that its cash rate target will remain at 4.35%, while the European Central Bank left interest rates unchanged at 4% at its meeting last week. Markets around the world are awaiting the Fed's call on rate hikes expected to be concluded tomorrow.