Japan raises interest rates for the first time in 17 years

Date:

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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.

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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

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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.”

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Bets on an interest rate hike increased this month after the Japan Confederation of Trade Unions, the country’s largest trade union association, said its seven million members would receive pay increases averaging greater than 5 percent this yr, the largest negotiated annual increase since 1991. This signifies that in 2023 the average salary increase will probably be around 3.6%.

Before the results of the wage negotiations were announced, investors expected that the Bank of Japan would need to wait longer to extend interest rates.

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Accelerating wage growth is a key signal to policymakers that the economy is robust enough to generate some inflation and may withstand higher interest rates. Like other major central banks, the Bank of Japan targets annual inflation of two percent; the rate has been at or above this level for almost a yr two years.

The wage increase signals that firms and staff expect higher prices to proceed, van Rijn said. “People no longer believe that prices will fall, which translates into wage demands.”

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The Bank of Japan said in a press release that “it is highly likely that wages will continue to rise steadily this year, following last year’s strong wage growth.”

Shizuka Nakamura, 32, a resident of Yokohama, a port city south of Tokyo, said she had noticed prices rising. “I’m really feeling the rising cost of living,” said Ms. Nakamura, who works in administrative positions at a construction company. She recently gave birth to a baby.

“My friends who are about the same age as me and who also have children say that things like diapers and baby formula are getting more and more expensive,” she said.

The change in the Bank of Japan’s interest rates was also significant since it was the last major central bank to finish its negative interest rate policy. Together with central banks in Denmark, Sweden, Switzerland and the euro zone, they broke the monetary policy taboo by cutting interest rates below zero – which essentially signifies that depositors pay banks to carry their money and creditors get back lower than they lend – in order to stimulating economic growth after the financial crisis in 2008. (Sweden has ended negative rates in 2019 and the remaining European central banks in 2022)

Negative central bank interest rates have driven global bond markets higher, with greater than $18 trillion price of debt traded at a peak in 2020 at negative yields. As inflation and economic growth return, and central banks have raised their interest rates – rather more aggressively than Japan, almost no debt currently has a negative yield.

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Rising interest rates in Japan make investing in the country relatively more rewarding for investors, but the Federal Reserve’s goal interest rate continues to be about five percentage points higher and the European Central Bank’s rate is 4 points higher. While foreign investors have begun to funnel money home, Japanese investors still find the yields abroad attractive though the Fed and ECB are expected to start cutting interest rates, making it difficult to quickly repatriate money to Japan.

Central bankers in Japan have also suggested a slow change in policy, believing that raising interest rates too quickly could hamper economic growth before it takes hold.

Kiuko Notoya reporting contributed.

Rome
Romehttps://globalcmd.com/
Rome: Visionary Founder of the GlobalCommand Ecosystem (GlobalCmd.com | GLCND.com | GlobalCmd A.I.) Rome is the innovative mind behind the GlobalCommand Ecosystem, a dynamic suite of platforms designed to revolutionize productivity for entrepreneurs, freelancers, small business owners, and forward-thinking individuals. Through his visionary leadership, Rome has developed tools and content that eliminate complexity, empower decision-making, and accelerate success. The Powerhouse of Productivity: GlobalCmd.com At the heart of Rome’s vision is GlobalCmd.com, an intuitive AI-powered platform designed to simplify decision-making and streamline workflows. Whether you’re solving complex business challenges, scaling a new idea, or optimizing daily operations, GlobalCmd.com transforms inputs into actionable, results-driven solutions. Rome’s approach is straightforward yet transformative: provide users with tools that deliver clarity, save time, and empower them to focus on growth and achievement. With GlobalCmd.com, users no longer have to navigate overwhelming tools or inefficient processes—Rome has redefined productivity for real-world needs. An Ecosystem Built for Excellence Rome’s vision extends far beyond productivity tools. The GlobalCommand Ecosystem includes platforms that address every step of the user’s journey: • GLCND.com: A professional blog and content hub offering expert insights and actionable advice across business, science, health, and more. GLCND.com inspires users to explore new ideas, sharpen their skills, and stay ahead in their fields. • GlobalCmd A.I.: The innovative AI engine powering GlobalCmd.com, designed to turn user inputs into tailored recommendations, predictive insights, and actionable strategies. Built on the cutting-edge RAD² Framework, this AI simplifies even the most complex decisions with precision and ease. The Why Behind GlobalCmd.com Rome understands the pressure and challenges of running a business, launching projects, and making impactful decisions in real time. His mission was to create a platform that eliminates unnecessary complexity and provides clear, practical solutions for users. Whether users are tackling new ventures, refining operations, or handling day-to-day decisions, Rome has designed the GlobalCommand Ecosystem to meet real-world needs with innovative, results-oriented tools. Empowering Success Through Simplicity Rome’s ultimate goal is to empower individuals with the right tools, insights, and strategies to take control of their work and achieve success. By combining the strengths of GlobalCmd.com, GLCND.com, and GlobalCmd A.I., Rome has created an ecosystem that transforms how people work, think, and grow. Start your journey to smarter decisions and greater success today. Visit GlobalCmd.com and take control of your future.

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