Bank of Japan ends the world’s only negative rates regime in a historic move, abandons yield curve control
Japan’s central bank raised interest rates on Tuesday for the first time since 2007, ending the world’s only negative rates regime on early signs of robust wage gains this year.
The Bank of Japan though cautioned it’s not about to embark on aggressive rate hikes, saying that it “anticipates that accommodative financial conditions will be maintained for the time being,” given the fragile growth in the world’s fourth-largest economy.
The BOJ raised its short-term interest rates to around 0% to 0.1% from -0.1%, according to its statement at the end of its two-day March policy meeting. Japan’s negative rates regime had been in place since 2016.
The BOJ also abolished its radical yield curve control policy for Japanese sovereign bonds, which the central bank has employed to target longer-term interest rates by buying and selling bonds as necessary.
The central bank though will continue purchasing government bonds worth “broadly the same amount” as before — currently about 6 trillion yen per month.
It would resort to “nimble responses” in the form of increased JGB purchases and fixed-rate purchases of JGBs, among other things, if there is a rapid rise in long-term interest rates.
Scaling back of its radical asset purchases and quantitative easing, the BOJ said it would stop buying exchange-traded funds and Japan real estate investment trusts (J-REITS). It also pledged to slowly reduce its purchases of commercial paper and corporate bonds, with the aim of stopping this practice in about a year.
These changes mark a historic shift and represent the sharpest pull back in one of the most aggressive monetary easing exercises in the world, which was aimed at lifting the Japanese economy out of its deflationary spiral.
The Japanese yen weakened to as much as 149.92 against the greenback, while the Nikkei stock index swung between gains and losses following the BOJ decision. Yields on the 10-year and 30-year JGBs dipped.
Financial markets had repositioned over the past week as local Japanese news reports and preliminary wage negotiation results fanned speculation that the BOJ could normalize rates a month earlier, ahead of its April meeting.