Hot Topic: Japan Raises Interest Rates After 17 Years, Ending World's Last Negative Interest Rate Regime

The Bank of Japan (BOJ) also announced an end to the yield curve control policy and stopped buying ETF funds.

After a two-day policy meeting, on March 19, the Japanese central bank officially raised interest rates after 17 years. With this move, Japan ended the world's last negative interest rate regime.

After positive signs of businesses accepting strong wage increases this year, the Bank of Japan (BOJ) increased short-term interest rates from -0.1% to about 0% - 0.1%. Negative interest rate regime has been applied in Japan since 2016.

BOJ is expecting Asia's second largest economy to return after a long period of deflation. Japan's policies are inherently at odds with other central banks (dramatically raising interest rates over the past two years to fight inflation due to the Covid-19 pandemic, conflicts and supply chain problems).

The Japanese central bank's ultra-loose monetary policy contributed to the rapid devaluation of the Yen, affecting households and creating deflationary pressure.

In addition to the decision to raise interest rates, the BOJ also announced the end of the yield curve control policy for 10-year Japanese government bonds. This is the policy the central bank adopts to target long-term interest rates, by buying and selling bonds as needed.

The BOJ said it will stop buying exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITS). They have bought a total of 37 trillion yen ($248 billion) in ETFs and 650 billion yen in J-REITs since 2010. They will also gradually reduce their purchases of corporate bonds and aim to stop them within a year. year.

However, the BOJ will continue to buy Japanese government bonds in the same amount as before. The move suggests the BOJ will maintain easy monetary conditions. Previously, the central bank said it would buy unlimited government bonds.

Before deciding to raise interest rates, the BOJ was almost "unmoved", maintaining an ultra-loose monetary policy, even though core inflation had increased above the target of 2% for more than a year. At that time, policymakers believed that price increases were largely due to imports.

However, there are still signs of sustained price increases.

Japan's largest labor union Rengo said last week that wage negotiations were underway with Japanese businesses and unionized workers. Currently, Japanese companies have accepted an average salary increase of 3.7%.

BOJ Governor Kazuo Ueda has repeatedly said that the outcome of this year's "shunto" wage negotiations will be key to sustained price increases. The BOJ expects higher wages to lead to domestic consumer demand, thereby boosting inflation.

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