Bank of Japan raises interest rates for the first time in 17 years

After eight years of negative interest rates, the BOJ has decided to shift away from this policy. This signifies a departure from its previous focus on stimulating growth through massive monetary stimulus.

Although this move represents Japan’s first interest rate hike in 17 years, rates remain close to zero. The cautious approach reflects the fragility of the economic recovery, compelling the central bank to proceed slowly with further increases in borrowing costs.

With this decision, the BOJ becomes the final major central bank to exit negative interest rates. This move marks the end of an era characterized by central banks globally employing unconventional monetary tools to bolster growth.

The BOJ has set the overnight call rate as its new policy rate and aims to guide it within a range of 0-0.1%. Additionally, the central bank plans to pay 0.1% interest on deposits, aligning its approach more closely with conventional monetary policy practices.

BOJ Governor Kazuo Ueda mentioned that further interest rate increases cannot be ruled out if trend inflation continues to rise. However, specific details regarding the pace and timing of future rate hikes were not provided.

Economists interpret this decision as the BOJ’s first step towards policy normalization, as ending the era of negative interest rates signals the central bank’s confidence in Japan’s emergence from deflationary pressures.

They anticipate that future rate hikes by the BOJ will be moderate. The central bank’s indication of maintaining accommodative financial conditions suggests a cautious approach, likely resulting in a limited narrowing of the interest rate differential between Japan and the United States.

The market reacted with fresh weakness in the Japanese yen against the US dollar following the announcement. This reflects expectations that the interest rate differential between the two countries will not narrow significantly in the near term.