In a landmark move, the BOJ ends the world’s only negative interest rate system

Japan’s central bank raised interest rates on Tuesday for the first time since 2007, ending the world’s only negative interest rate regime after the first signs of serious wage growth this 12 months.

However, the Bank of Japan cautioned that it didn’t intend to pursue aggressive interest rate increases, saying it “anticipates that accommodative financial conditions will remain for the time being” given the fragile growth of the world’s fourth-largest economy.

BOJ is estimated to have raised its short-term interest rates to around 0% to 0.1% from -0.1%. statement at the end of the two-day political meeting in March. The negative interest rate system in Japan has been in force since 2016.

The BOJ also abolished its radical policy of Japanese government bond yield curve control, which the central bank used to set goal long-term interest rates by buying and selling bonds as needed.

However, the central bank will proceed to purchase government bonds in “essentially the same amount” as before – currently about 6 trillion yen per 30 days.

It would resort to “agile responses” in the type of increased JGB purchases and fixed-rate JGB purchases, amongst other things, if long-term interest rates rise sharply.

Reducing dramatic asset purchases and quantitative easing, the BoJ said it might stop buying exchange-traded funds and Japanese real estate investment trusts (J-REITS). He also committed to slowly limiting the purchases of business paper and company bonds in order to discontinue this practice in about a 12 months.

The changes mark a historic shift and represent the sharpest withdrawal from one among the world’s most aggressive monetary easing programs, which was geared toward pulling the Japanese economy out of a deflationary spiral.

The rate weakened to 149.92 against the dollar, and the stock index fluctuated between gains and losses after the BOJ decision. Yields on 10-year and 30-year JGBs have declined.

The situation in financial markets modified over the past week as local Japanese news reports and preliminary results of wage negotiations fueled speculation that the BoJ may normalize rates a month earlier, ahead of its April meeting.

The Bank of Japan barely veered from its ultra-loose monetary policy although “core inflation” – which excludes food and energy prices – has exceeded its 2% goal for greater than a 12 months as policymakers concluded price increases were largely driven by imports .

BOJ Governor Kazuo Ueda has repeatedly said that the final result of this 12 months’s wage negotiations will probably be key to sustained price increases. The Bank of Japan expects higher wages to guide to a positive spiral, with domestic demand driving inflation.

“Service prices continue to rise moderately, partly due to the moderate wage increases observed to date,” the BoJ said in a statement.

“As these latest data and anecdotal information have step by step shown that the business cycle between wages and costs has change into more robust, the Bank considered that it has change into clear that the price stability objective will probably be achieved in a sustainable and stable manner towards the end of the projection period set out in the January 2024 Outlook Report.” – added.

Ongoing spring wage negotiations between Japan Inc and its unionized employees have up to now yielded a weighted average increase in base pay of three.7%, Rengo, Japan’s largest trade union federation, said on Friday in its first preliminary update.

This result’s much more solid than last 12 months’s growth, which was the largest increase in three a long time.