Bank of Japan scraps negative rate policy in first hike since 2007

The Bank of Japan (BOJ) has delivered a seismic announcement, slamming the brakes on its negative interest rate policy—a bold departure from its long-standing stimulus measures. This historic move marks Japan’s first interest rate hike since the distant echoes of 2007. 

The widely anticipated decision was made following substantial salary increases obtained by employees at several of Japan’s leading firms, marking the largest pay rise since 1991. This boosted BoJ Governor Kazuo Ueda’s confidence that inflation would remain at a moderate level.  

“The Bank of Japan ended ultra-loose monetary policy today but we don’t think it will raise its policy rate any further,” said Marcel Thieliant, Head of Asia-Pacific at Capital Economics. 

BOJ Governor Kazuo Ueda is poised to take the podium today at 0630 GMT, shedding light on this monumental decision. The negative interest rate policy, which levied a 0.1 per cent charge on a privileged few financial institutions’ excess reserves parked at the central bank, has loomed large since its inception in 2016.  

With a majority 7-2 vote, the BoJ confirmed its intention to continue purchasing Japanese government bonds at approximately the current rate. Furthermore, the central bank decided to abandon yield curve control (YCC), a policy established in 2016 to keep long-term interest rates near zero. 

“We think the BoJ will need a lot more convincing that inflation is truly on the path to sustained 2 per cent inflation before hiking again. Indeed, there are signs that inflationary pressures may be easing. We think the BoJ will need a lot more convincing that inflation is truly on the path to sustained 2 per cent inflation before hiking again. Indeed, there are signs that inflationary pressures may be easing,” said Tom Kenny, Senior International Economist at ANZ.

“We think it will be some time before there is evidence that 2 per cent inflation is truly sustained. Thus any additional hikes from the BoJ look to be some way off.” 

But economists caution that the pace of further rate hikes will be notably sluggish now, with much hinging on the sustainability of inflation above 2 per cent.

“Looking ahead, the sheer strength of pay hikes in this year’s spring wage negotiations (Shunto) poses some upside risks to our inflation forecasts. However, we suspect that wage growth among smaller firms won’t be quite as strong as among those firms participating in the Shunto,” Capital Economics’ Thieliant added. 

“And with inflation coming off the boil now, it seems likely that trade unions will push for smaller pay hikes in next year’s talks. With wage growth peaking this year, we still expect inflation to fall below the BoJ’s target by the end of the year so the Bank won’t feel the need to lift its policy rate any further.”