Japan’s central bank yesterday raised its benchmark interest rate for the first time in 17 years, ending a longstanding policy of negative rates meant to boost the economy.
The Bank of Japan’s lending rate for overnight borrowing by banks was raised to a range of 0 to 0.1 percent from minus-0.1 percent at a policy meeting that confirmed expectations of a shift away from ultra-lax monetary policy.
It was the first rate hike since February 2007. The negative interest rate policy, combined with other measures to inject money into the economy and keep borrowing costs low, “have fulfilled their roles,” Bank of Japan Governor Kazuo Ueda told reporters.
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The central bank has an inflation target of 2 percent that it used as a benchmark for whether Japan had finally escaped deflationary tendencies. There was “a positive cycle” of a gradual rise in wages and prices, Ueda said, adding that that monetary policy would remain easy for some time.
Although private-sector banks and other financial organizations will make their own decisions about rates, Ueda said he did not foresee any drastic rises.
The central bank would watch for any big moves in rates, which would cause confusion, he said.
“We made the decision because we foresaw stable and continuous 2 percent inflation,” he said.
Another factor supporting the shift: Japanese companies have announced relatively robust wage hikes for this year’s round of negotiations with trade unions.
Wages and profits at companies were improving, the bank said, in releasing its latest decision, referring to “anecdotal” accounts as well as data it had gathered lately.
“Japan’s economy has recovered moderately,” it said.
Market reaction was muted as the decision had been anticipated after Japanese media reports earlier this week. Tokyo’s benchmark Nikkei 225 index gained about 0.7 percent yesterday, while the US dollar was steady at about ¥150.
Bank officials said they want to make sure inflation is based on domestic factors that can sustain higher wages, not external ones.
The bank likely would not rush to change its overall easy lending framework and would closely monitor prices, analysts said.
The ultra-lax monetary policy also included huge injections of money into the economy through purchases of Japanese government bonds and other assets. The bank would continue with those government bond purchases at a rate of about ¥6 trillion and adjust quickly depending on economic trends, it said.
However, the bank called an end to other unorthodox policies including its yield curve control program, which allows bonds to move in a tight band, and the purchase of exchange-traded funds because they had “fulfilled their roles,” it said.
In its assessment of the economy that the current recovery was based partly on a “materialization of pent-up demand” even as global demand has weakened, the Bank of Japan said.
However, it said that industrial production was stagnant, partly due to cutbacks by vehicle manufacturers.
Housing investment was relatively weak and government spending was “more or less flat,” it said.
Ueda characterized the situation as “less than perfect.”
“Concerning risks to the outlook, there are extremely high uncertainties surrounding Japan’s economic activity and prices,” the bank said.
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