The Bank of Japan has made a historic decision to terminate the world’s only negative rates regime and abandon its yield curve control policy

Japan’s central bank raised interest rates on Tuesday for the first time since 2007, marking a significant departure from its previous negative rates policy and other unconventional measures aimed at tackling deflation.

This move signals a historic shift and represents a notable reversal in one of the world’s most aggressive monetary easing strategies, which aimed to boost prices in the Japanese economy. The Bank of Japan’s decision also comes ahead of the U.S. Federal Reserve’s upcoming interest rate decision later this week.

BOJ Governor Kazuo Ueda stated during a press conference after the central bank’s decision that the likelihood of achieving stable inflation has increased significantly, leading to the decision to raise rates. However, he emphasized that the bank does not intend to pursue aggressive rate hikes, as the Japanese economy’s growth remains fragile.

The BOJ raised its short-term interest rates to around 0% to 0.1% from the previous -0.1% level, effectively ending Japan’s negative rates regime that had been in place since 2016. Additionally, the central bank abolished its radical yield curve control policy for Japanese sovereign bonds, opting instead to continue purchasing government bonds at a similar rate as before.

While the BOJ plans to maintain accommodative financial conditions for the time being, it stands ready to respond with increased bond purchases and other measures if long-term interest rates rise rapidly. Furthermore, the bank announced a gradual reduction in its purchases of exchange-traded funds, Japan real estate investment trusts, commercial paper, and corporate bonds over the coming year.

Governor Ueda described the BOJ’s holdings of Japanese government bonds and exchange-traded funds as remnants of its extraordinary monetary easing measures. However, he deferred questions on the impact of these policies until an ongoing review is completed.

Following the announcement, the yen weakened against the dollar, and yields on 10-year Japanese government bonds declined. The Nikkei stock index experienced volatility but ended slightly higher.

The decision to raise rates comes amid ongoing spring wage negotiations between Japanese companies and unions, which have resulted in significant pay increases. The BOJ views these wage increases as crucial for sustainable price growth and expects them to stimulate domestic demand, thereby fueling inflation.

Despite concerns about potential risks to the global economy and the possibility of weaker-than-expected consumption, the BOJ remains cautiously optimistic about achieving its inflation target. However, Governor Ueda noted that any significant deviation from the price forecast or an increase in upside risks could prompt a policy change.

Investors and analysts are awaiting the BOJ’s updated economic forecast at its April meeting, which will provide further insight into the bank’s monetary policy outlook. Governor Ueda highlighted Japan’s accommodative monetary conditions but stressed the importance of assessing real interest rates and inflation expectations in shaping future policy decisions.

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