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In a historic move, the Bank of Japan (BoJ) has decided to end its negative interest rate policy in anticipation that the country is beginning to recover from an extended period of disinflation.
Following a two-day policy meeting, the BoJ adjusted its guidance for overnight lending rates to between 0% and 0.1%, a slight increase from the previous range of -0.1% to 0%. This is the central bank’s first rate hike in 17 years and positions it as the last major monetary institution to move away from negative interest rates.
This adjustment by the BoJ follows recent wage negotiations, where Japan’s largest employers agreed to a 5.28% wage hike with major labour unions, representing the most significant salary increase in 33 years.
Additionally, the BoJ decided to discontinue its yield curve control (YCC) policy, which was initially implemented in 2016 to stabilise the yield on 10-year Japanese government bonds at approximately 0%, ensuring favourable financial conditions.
In a research note, Morgan Stanley analysts explained that the BoJ’s pivot could be described as a “virtuous cycle of rising nominal GDP growth, wages, prices, and corporate profits.”
As per the Japanese central bank, “the policy framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control and the negative interest rate policy to date have fulfilled their roles.”
Markets unimpressed by BoJ pivot
“The markets have anticipated the BoJ action, which explains the lack of big moves in the currency, bond, and equity markets,” Björn Jesch, CIO of German asset management company DWS, wrote in a note. “Although the Nikkei 225 remained just a tad below its all-time high, the Yen weakened to beyond 150 per USD, since the BoJ continued to maintain an ‘accommodative’ stance to support the economy.”
In the recent scenario, economists of bank ING now expect 10 basis points of hikes for the year. “By the end of the second quarter we will have more data and information to judge whether the central bank can deliver another rate hike in the second half of the year. Given the strong outlook for wage growth, we believe an additional hike may become a more likely option,” wrote Senior Economist, South Korea and Japan, Min Joo Kang.
