The Bank of Japan made a significant decision on Tuesday, ending eight years of negative interest rates and other unconventional policies aimed at boosting economic growth. This marks a historic shift away from the focus on stimulating growth through massive monetary stimulus measures.
Despite being Japan's first interest rate hike in 17 years, the move maintains rates at nearly zero due to concerns about the fragility of the economic recovery. Analysts suggest that the central bank is proceeding cautiously with any further increase in borrowing costs.
This decision by the Bank of Japan signifies the conclusion of an era where central banks globally relied on low interest rates and unconventional tools to support economic growth.
As anticipated, the BOJ abandoned the policy implemented in 2016, which involved charging a 0.1% fee on certain excess reserves held by financial institutions at the central bank.
The BOJ now uses the overnight call rate as its new policy rate and aims to keep it within a range of 0-0.1%, partly achieved by paying 0.1% interest on deposits held at the central bank.
Despite the symbolic significance of this being Japan's first rate hike in 17 years, experts believe its direct impact on the economy will be minimal. The BOJ is likely to maintain loose monetary conditions, preventing a substantial increase in funding costs or household mortgage rates.
With inflation surpassing the BOJ's 2% target for over a year, many in the market had anticipated an end to negative interest rates in March or April.
Attention now shifts to Governor Kazuo Ueda's post-meeting news conference for insights into the pace of future rate hikes. The potential consequences are considerable, as a surge in bond yields could elevate Japan's substantial public debt, the largest among advanced economies.
The termination of Japan's role as the last provider of cheap funds could also impact global financial markets, as Japanese investors may redirect investments back to their home country in search of higher yields.
Under former Governor Haruhiko Kuroda, the BOJ launched a substantial asset-buying program in 2013 to stimulate inflation toward a 2% target within a two-year timeframe.
In response to tepid inflation, the BOJ introduced negative interest rates and yield curve control in 2016. However, criticism over the adverse effects of ultra-low interest rates prompted adjustments to its stimulus measures, including a relaxation of its grip on long-term rates.
Paraphrasing text from "Reuters" all rights reserved by the original author.
