The Bank of Japan has terminated eight years of negative interest rates and other unorthodox policies, marking a historic move away from expanding GDP with decades of huge monetary stimulus.
Analysts believe Japan’s first interest rate hike in 17 years will keep rates around zero as a shaky economic recovery requires the central bank to slow borrowing costs.
Japan is the final central bank to leave negative rates, ending an era when officials used cheap money and unconventional monetary measures to boost growth.
“The BOJ today took its first, hesitant step toward policy normalisation,” said Frederic Neumann, chief Asia economist at HSBC in Hong Kong, while adding further, “The abolition of negative interest rates in particular underlines the BOJ’s confidence that Japan has departed from deflation.”
Bank of Japan eliminated a 2016 programme that charged financial institutions 0.1% on excess reserves in a widely predicted move.
The Bank of Japan set the overnight call rate as its new policy rate and guided it between 0-0.1% by paying 0.1% interest on central bank deposits.
The central bank also ended yield curve control, which has kept long-term interest rates at zero since 2016.
In a statement, the Bank of Japan said it will buy “broadly the same amount” of government bonds and increase purchases if yields climb rapidly.
The Bank of Japan also stopped buying riskier ETFs (Exchange Traded Funds) and JRREITs (Real Estate Investment Trusts).
The central bank explained its decision to remove former Governor Haruhiko Kuroda’s enormous stimulus programme: “We decided that sustainable, stable achievement of our pricing target came in sight.”
With inflation over the BOJ’s 2% objective for nearly a year, many market players expected negative interest rates to cease in March or April of 2024.
The BoJ expects “accommodative financial conditions will be maintained for the time being,” indicating a slight rate hike further.
The tone contrasted with the statement’s more dovish direction, which committed to increasing stimulus as needed and money printing until inflation stabilised above 2%.
Japanese shares were turbulent in mid-March. The yen plummeted to almost 150 per dollar as investors saw the Bank of Japan’s dovish advice as a sign the United States-Japan interest rate divergence will remain high.
Markets are watching Governor Kazuo Ueda’s post-meeting news conference for rate hike hints.
The stakes are high. Japan has the greatest public debt in major economies, twice the size of its economy. Rising bond yields would make funding more expensive.
An end to the world’s last inexpensive fund provider could also shake global financial markets as Japanese investors pull money home after seeking yields abroad.
Under former Governor Kuroda, the Bank of Japan launched a massive asset-buying programme in 2013 to boost inflation to 2% in two years.
In 2016, the central bank instituted negative rates and yield curve control to make its stimulus programme more sustainable due to low inflation.
Last year, the Bank of Japan adjusted yield curve control to loosen its hold on long-term rates as the yen’s rapid losses raised import prices and drew public criticism of Japan’s ultra-low interest rates.
Meanwhile, Japan’s economy expanded at an annualised clip of 0.4% in October to December 2023 from the previous quarter, better than the initial estimate for a 0.4% contraction, the latest government data showed.
“The fresh data meant Japan’s economy, now the world’s fourth-largest behind Germany, avoided a technical recession thanks to companies’ stronger-than-expected spending on plants and equipments,” reported Reuters.
On a quarter-on-quarter basis, GDP grew 0.1%, compared with the initial 0.1.% drop reading and a median forecast for a 0.3% rise. Capital expenditure, on the other hand, increased 2.0% quarter-on-quarter, better than the preliminary 0.1% decrease the government announced, but below a median market forecast of a 2.5% rise.
Also, private consumption, which makes up about 60% of Japan’s economy, fell 0.3% from October to December 2023, slightly worse than the 0.2% drop in the initial estimate.
Japan recently witnessed inflation-adjusted real wages shrinking for the 22nd month in a row, while year-on-year household spending in January 2024 marked the biggest drop in 35 months. External demand contributed 0.2% points to real GDP, unchanged from the preliminary reading.