The Bank of Japan has ended the world’s last negative interest rate policy as it raised borrowing costs for the first time in 17 years.
The short-term rate was raised to a range of zero to 0.1pc from minus 0.1pc in a widely-expected move.
It is the first rate increase since February 2007 after the Bank said that the negative interest rate policy, combined with other measures to inject money into the economy and keep borrowing costs low, “have fulfilled their roles”.
The shift makes Japan the last central bank to exit negative rates and ends an era in which policymakers around the world sought to prop up growth using cheap money and unconventional monetary tools.
Negative interest rates effectively charged banks to keep their money at the Bank of Japan and the hope was banks would loan out their capital instead, boosting economic activity.
The rate rise comes as inflation headed towards the Bank of Japan’s 2pc target in recent months.
The shift was also influenced by Japanese companies announcing relatively robust wage increases for this year’s round of negotiations with trade unions.
Wages and profits at companies were improving, the Bank of Japan said, in releasing its latest decision, referring to “anecdotal” accounts as well as data it had gathered lately.
“Japan’s economy has recovered moderately,” it said.
Following the decision, Tokyo’s benchmark Nikkei 225 index gained 0.7pc, while the Japanese yen fell 0.3pc to 149.66 per dollar.
The last time the BoJ raised interest rates was in 2007, but its war against deflation began in earnest in 2013 under then-prime minister Shinzo Abe.
“Abenomics” combined generous government spending and central bank monetary easing.
The BoJ spent vast amounts on bonds and other assets to pump liquidity into the system, targeting inflation of two percent that policymakers hoped would fuel growth.
It was “an extremely ambitious goal” and it did not work right away, said Kazuo Momma, an economist at Mizuho Research and Technologies.
He told AFP: “Having failed to achieve the target within a committed two-year period, the BoJ had no other choice than to pursue further stimulative measures including the negative interest rate.”
Frederic Neumann, chief Asia economist at HSBC, said:
The BOJ took its first, tentative step towards policy normalization. The big question is what happens next.
Likely, the BOJ will find that it is getting ‘stuck at zero’, being unable to lift short-term interest rates meaningfully further in the coming quarters.
