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 boost an economy that has long struggled to grow.
In 2016, the Bank of Japan took the unorthodox step of bringing borrowing costs below zero, in a bid to revive borrowing and lending and boost the country’s stagnant economy. Negative interest rates – which central banks in some European economies have also implemented – force depositors to pay to leave their money in a bank, giving them an incentive to spend it.
But Japan’s economy has recently begun to show signs of stronger growth: inflation, after being low for years, has accelerated, cemented by larger-than-usual wage increases. Both indices indicate that the economy may be on a path to stronger growth, allowing the central bank to tighten interest rate policy years after other major central banks rapidly raised rates in response to an increase in inflation.
Even after Tuesday’s decision, interest rates in Japan lag far behind those in the world’s other major developed economies. The Bank of Japan’s policy rate was raised to a range of zero to 0.1 percent minus 0.1 percent.
The bank, in a statement Tuesday, said it concluded that the economy was in a “virtuous circle” between wages and prices, meaning that wages were rising enough to cover rising prices but not so much that reduce corporate profits. Japan’s headline inflation figure was 2.2 percent in January, the most recent data available.
The central bank also abandoned a policy where it bought Japanese government bonds to limit the rise in market rates, encouraging businesses and households to borrow more cheaply. The bank has gradually eased policy over the past year, leading to higher debt yields as the country’s growth prospects have improved.
The bank said negative interest rates and other measures taken to stimulate the economy “have served their purpose.”
In many countries, a surge in inflation has plagued consumers and policymakers, but in Japan, which more often struggles with growth-sapping deflation, the recent rise in prices has been welcomed by most. economists. Japan’s stock market, buoyed by the economy’s upward trend and shareholder-friendly corporate reforms, has attracted huge amounts of money from investors around the world, recently helping the Nikkei 225 index rise. breaking a record since 1989. The Nikkei index rose slightly. Tuesday after the Bank of Japan’s announcement.
The move away from negative interest rates, which is expected to help shore up the country’s weak currency, is seen by investors as another important step in Japan’s recovery.
“This is a new step in the normalization of monetary policy in Japan,” said Arnout van Rijn, a portfolio manager at Robeco, who established and led the Dutch fund manager’s Asian office for more than a decade. “As a long-time disciple of Japan, this is very important.”
Bets on higher interest rates were strengthened this month after the Japanese Trade Union Confederation, the country’s largest union association, said its seven million members would benefit from average wage increases of more than 5 percent this year, the largest negotiated annual increase since 1991. That’s on top of an average wage increase of around 3.6 percent in 2023.
Before the results of the wage negotiations were announced, investors expected the Bank of Japan to wait longer before raising interest rates.
Accelerating wage growth is a crucial sign to policymakers that the economy is strong enough to generate some inflation and can withstand higher interest rates. Like other major central banks, the Bank of Japan targets annual inflation of 2%; the rate has been at or above this for almost two years.
Rising wages indicate that businesses and workers expect higher prices to continue, van Rijn said. “People no longer believe that prices will fall to the point that this will have an impact on wage demands. »
The Bank of Japan, in its statement, concluded that “it is very likely that wages will continue to rise steadily this year, following last year’s firm wage increase.”
Shizuka Nakamura, 32, a resident of Yokohama, a port city south of Tokyo, said she had noticed rising prices. “I feel the rising cost of living,” said Ms. Nakamura, who works in an administrative position at a construction company. She recently had a child.
“My friends who are around the same age as me and have also had children all say that things like diapers and formula are getting more and more expensive,” she said.
The Bank of Japan’s rate move was also significant because it was the last major central bank to abandon its negative rate policy. She and the central banks of Denmark, Sweden, Switzerland and the Eurozone have broken monetary policy taboos by pushing rates below zero – which essentially means depositors pay banks to hold their money and creditors receive less in return than they lend – in a bid to revive economic growth. after the 2008 financial crisis. (Sweden completed negative rates in 2019, and the other European central banks followed in 2022.)
Negative central bank policy rates have sent global bond markets soaring, with more than $18 trillion of debt securities trading at a negative yield at the 2020 high. As inflation and economic growth have returned and that central banks have raised their key rates – much more aggressively than In Japan, virtually no debt now has a negative yield.
Rising rates in Japan make investing in the country relatively more rewarding for investors, but the Federal Reserve’s target rate is still about five percentage points higher and the European Central Bank’s target rate is four points higher . While foreign investors have started injecting cash into the country, for Japanese investors, overseas yields remain attractive, although the Fed and ECB are expected to start cutting rates, spurring rapid cash repatriation towards Japan.
The Bank of Japan also suggested it would gradually change its policy. Raising rates too quickly could wipe out growth before it takes hold.
Kiuko Notoya reports contributed.
