The Bank of Japan on Tuesday ended eight years of negative interest rates and other remnants of its unorthodox monetary policy, making a historic shift from its focus on reflation of growth with decades of massive monetary stimulus.
While the move was Japan’s first interest rate hike in 17 years, analysts say it still keeps rates around zero as the fragile economic recovery forces the central bank to slow down with further increases in borrowing costs.
The move makes Japan the latest central bank to exit negative rates and ends an era in which policymakers around the world sought to support growth through cheap money and unconventional monetary tools.
“We have returned to a normal monetary policy that targets short-term interest rates, just like other central banks,” BOJ Governor Kazuo Ueda said at a news conference after the decision.
“If inflation trends rise further, this could lead to an increase in short-term rates,” Ueda said, without elaborating on the likely pace and timing of further increases.
In a widely expected decision, Japan’s central bank has abandoned former President Haruhiko Kuroda’s 2016 policy of applying a 0.1% tax on some excess reserves held by financial institutions at the central bank.
The Bank of Japan set the overnight rate as the new interest rate and decided to set it in a range between 0% and 0.1%, partly by paying 0.1% interest on deposits at the central bank .
“The Bank of Japan today took the first step towards normalizing monetary policy,” said Frederic Neumann, chief Asia economist at HSBC.
“The elimination of negative interest rates, in particular, signals the central bank’s confidence that Japan has emerged from the grip of deflation.”
The central bank also abandoned yield curve control, a policy in place since 2016 that capped long-term interest rates around zero, and halted purchases of risky assets.
But it said it will continue to buy “roughly the same amount” of government bonds as before and will increase purchases if yields rise rapidly, underscoring its focus on avoiding any damaging increases in borrowing costs.
Demonstrating that future rate hikes will be moderate, the Bank of Japan also said it expects “accommodative financial conditions to be maintained for the time being.”
Source: Terra
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