For first time in 17 years, Japan increases interest rates
The Bank of Japan (BOJ) has concluded its eight-year-long policy of negative interest rates. The decision signifies a major shift from the long-standing practice of substantial monetary stimulus to propel growth. This is the first time in 17 years that Japan has seen an increase in interest rates, although they remain close to zero due to the country's delicate economic recovery. With this move, Japan becomes the last country to abandon negative rates, marking the end of an era.
BOJ halts policy of levying charges on excess reserves
In a widely anticipated move, the BOJ has discontinued a policy introduced in 2016 that levied a 0.1% charge on certain excess reserves held by financial institutions at the central bank. The BOJ has now established an overnight call rate as its new benchmark interest rate and will guide it within a range of 0-0.1%, partly by offering 0.1% interest on deposits at the bank. This is viewed as symbolic, signifying Japan's first rate increase in almost two decades.
Expert opinions on BOJ's policy shift and its consequences
Izumi Devalier, head of Japan economics at BofA Securities, underscored the symbolic importance of this rate increase, which is the first in 17 years. However, she also pointed out that "the actual impact on the economy is very small," as it is anticipated that the BOJ will maintain loose monetary conditions. Devalier further mentioned that no significant rise in funding costs or household mortgage rates is expected following this policy shift.
Market responses and future projections
As inflation has exceeded BOJ's 2% target for over a year, numerous market participants had forecasted the termination of negative interest rates around March or April. Currently, markets are closely watching Governor Kazuo Ueda's post-meeting press conference for clues about the speed of future rate increases. The stakes are high as a surge in bond yields could escalate the cost of financing Japan's enormous public debt, which is twice the size of its economy.
Global consequences of BOJ's policy shift
The cessation of negative rates by the world's last source of cheap funds could potentially unsettle global financial markets. Japanese investors, who have amassed overseas investments in pursuit of yields, might begin rerouting money back to their homeland. This shift could trigger significant alterations in global investment trends, highlighting the extensive implications of BOJ's policy change.
