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The Bank of Japan ended an era of negative interest rates by raising borrowing costs for the first time since 2007, marking a historic shift as the country puts decades of deflation behind it.
Kazuo Ueda, the governor of the BoJ, has put an end to more than a decade of extremely expansionary monetary policy, abandoning a series of easing measures implemented to stimulate Asia’s most advanced economy.
After a 7-2 majority vote, the BoJ said it will guide the overnight interest rate to remain in a range of zero to 0.1%, making it the latest central bank to end the use of rates negative as an instrument of monetary policy. Its key rate was previously minus 0.1%.
The BoJ adopted negative interest rates in 2016 in an attempt to encourage banks to lend more to generate spending and contain the risks of a global economic slowdown.
Tuesday’s policy is likely to trigger changes in global investment flows over time, as domestic yields become more attractive to Japanese investors, and comes as signs emerge of a broader shift in the Japanese economy.
Workers at some of Japan’s largest companies secured the biggest pay rise since 1991, giving Ueda enough confidence that moderate inflation will continue – a goal that has been central to the bank’s policies for years.
More and more companies are also passing on the costs of inflation to consumers, and labor shortages are contributing to rising wages.
Investors have also gained greater confidence in the economy’s prospects. In February the Nikkei 225 stock index finally surpassed the level it reached 34 years ago.
Despite the return to positive interest rates, BoJ officials do not see the first hike as a sign that more will soon follow.
Inflation, triggered by rising prices of imported energy and food, is well past its peak. Core inflation, which excludes volatile fresh food prices, slowed in January for the third straight month.
“Given the current outlook for economic activity and prices, the bank expects accommodative financial conditions to be maintained for the time being,” the BoJ said.
The central bank also removed yield curve controls on Tuesday, another policy put in place in 2016 to bolster its massive monetary easing measures by capping yields on 10-year Japanese government bonds.
The BoJ said it would maintain its policy of buying about 6 trillion yen ($40 billion) a month in Japanese government bonds, a pledge that underlines the economy’s continued weakness as household consumption remains sluggish.
But it will halt purchases of Japanese exchange-traded funds and real estate investment trusts.
Under the new regulatory framework, the BoJ will apply an interest rate of 0.1% to deposits held at the central bank, eliminating the complicated three-tier system of borrowing costs adopted to limit the blow of negative rate policy on banks commercial. earnings.
While the end of negative interest rates was widely expected, economists were divided over how far the BoJ would go in abolishing other measures such as yield curve controls and ETF purchases.
Sayuri Shirai, a former BoJ board member who opposed the introduction of negative interest rates in 2016, said that because the economic conditions for further rate hikes were not yet in place, the BoJ appeared to have decided to have just a chance to act.
“We must give credit to Mr. Ueda for his resolve and boldness. Instead of doing it gradually, he just dropped everything altogether and that probably also means that’s it,” he said.
Ueda’s decision drew opposition from two BoJ board members, one of whom argued that he should avoid removing both negative interest rates and yield curve controls until the “virtuous circle” ” between wages and prices had not become more solid.
The yen rose slightly after the announcement, but fell against the U.S. dollar to ¥150.28 on Tuesday. The Nikkei 225 stock index rose 0.5%.
Additional reporting by William Sandlund in Hong Kong