Japan’s central bank on Tuesday raised interest rates for the first time since 2007, pushing them above zero, closing a chapter in its aggressive efforts to spice up an economy that has long struggled to grow.
In 2016, the Bank of Japan took the unconventional step of cutting borrowing costs below zero in an try and revive borrowing and lending and spur the country’s stagnant economy. Negative interest rates – also utilized by central banks in some European economies – mean depositors pay to depart their money in the bank, giving them an incentive to spend it.
However, the Japanese economy has recently began to point out signs of stronger growth: inflation has accelerated after years of remaining low, supported by higher than usual wage growth. Both indications indicate that the economy could also be heading in the right direction for more sustained growth, allowing the central bank to tighten interest rate policy years after other major central banks quickly raised rates in response to a spike in inflation.
Even after Tuesday’s decision, interest rates in Japan are removed from those in the world’s other major developed economies. The Bank of Japan’s goal interest rate has been raised to range zero to 0.1 percent from minus 0.1 percent
In a press release on Tuesday, the bank said it had concluded that the economy was in a “positive cycle” between wages and costs, meaning wages were rising enough to cover rising prices but not enough to cut back corporate profits. . Japan’s headline inflation reading for January was 2.2 percent, the latest data available.
The central bank also scrapped a policy of shopping for Japanese government bonds to regulate how high market rates could rise, encouraging low cost borrowing by businesses and households. The bank has slowly eased this policy over the past yr, resulting in higher debt yields as the country’s growth prospects improve.
In many countries, soaring inflation has been troubling consumers and policymakers, but in Japan, which has more often faced deflation that has sapped economic growth, most economists have welcomed the recent price rise. The Japanese stock market, boosted by a bullish economy and company reforms favoring shareholders, has attracted huge sums of cash from investors around the world, which recently helped the Nikkei 225 index break its record high since 1989.
Investors see the move away from negative interest rates, which should help strengthen the country’s weak currency, as one other essential step towards changing the situation in Japan.
“This is another milestone in the normalization of monetary policy in Japan,” said Arnout van Rijn, portfolio manager at Robeco, who founded and led the Dutch fund manager’s Asia office for greater than a decade. “For me, as a long-time supporter of Japan, this is very significant.”
