Bank of Japan Raises Its Interest Rate in 17 Years

The Bank of Japan (BoJ) raises its interest rate in 17 Years. On 19th March 2024, the Bank of Japan (BoJ) raised its interest rate for the first time  in 17 Years. By making this significant shift in its monetary policy it ended its era of negative interest rates – which prevailed for 8 years (initiated in 2016).

This is a historic decision made by Japan showing its departure from its aggressive monetary policy-easing program; that came into existence in the 1990s to combat chronic deflation and stagnation which plagued the economy. Let us delve into the topic

Changes in the Monetary Policy Framework

On 19th March 2024, at the Monetary Policy meeting, the Policy Board of the Bank of Japan evaluated the virtuous cycle between wages & prices. The Board stated that it also noticed that the price stability target of 2% would be achieved in a sustainable and stable manner toward the end of the projection period of the January 2024 Outlook Report (Outlook for Economic Activity and Prices).

The Bank of Japan stated that the negative interest rate policy along with the policy framework of Quantitative and Qualitative Monetary Easing (QEE) have fulfilled their roles to date. The bank also stated that considering the present economic activity and price trends, the Bank foresees that it will continue to sustain accommodative financial conditions for the time being. The short-term interest rate will be the primary tool in response to developments in economic activity and prices along with financial conditions to achieve a sustainable and stable achievement of the target.

In its Changes in policy framework, BoJ made the following decisions along with guidelines for the market operations based on the above analysis.

1. Guidelines for market operations:

  1.  The market operations guidelines for the inter-meeting period are as follows.
  2. The uncollateralized overnight call rate will be encouraged by the Bank to remain at around 0 to 0.1%.

2. Purchase of Japanese government bonds (JGBs):

The Bank will continue to purchase the same amount (i.e. 6 trillion yen per month). In case of a quick increase in long-term interest rates, this will enable prompt measures, including a rise in the quantity of JGB purchases, conducting fixed-rate purchase operations of JGBs and the fund-supplying operations against pooled collateral.

3. Asset purchases other than JGB purchases:

  • The Bank will stop buying Exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs).
  • Approximately a year from now, the bank will stop buying corporate and CP bonds, gradually reducing the amount of buys.

4. Treatment of new loan disbursements under the Fund-Provisioning Measure to Stimulate Bank Lending etc.

Lending under the Fund-Provisioning Measure to Stimulate Bank Lending, the Funds-Supplying Operation to Support Financing for Climate Change Responses, and the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas will all be made available by the Bank. The loans will have a one-year duration and charge 0.1% interest.

Regarding the Fund-Provisioning Measure to Stimulate Bank Lending, each eligible counterparty’s maximum borrowing amount will be equal to the net rise for loans that it has outstanding.

Brief Economy Outlook

Japan’s economy has somewhat recovered, despite certain signs of weakness which is visible in Outlook for Economy and Prices.  When examining the background factors influencing wage developments, it is evident that corporate profits have been rising and labour market conditions have been tight. Given the current circumstances and the outcomes of the annual spring labour-management wage negotiations, it is very likely that wages will rise gradually this year in addition to last year’s firm wage increase. BoJ gathered information that suggests that many business firms maintained their stance on increasing wages.

In terms of Prices, the effects of an increase in cost due to past increases in import prices, that was being pass-through to consumer prices, have declined; service prices have continued to increase mildly – partly due to a moderate increase in wages. The Bank noticed and concluded that the price stability target would be achieved in a sustainable and stable manner toward the end of the projection period of the January 2024 Outlook Report. It observed that recent data and anecdotal information have shown that the virtuous cycle and prices become more solid.

My Perspective/ Conclusion

BoJ was the last major central bank to exit from a negative-rate policy. It is to be remembered that Central banks in Switzerland, Denmark, Sweden, and the Eurozone along with the BoJ broke monetary policy taboos of pushing interest rates below zero to ignite economic growth aftermath of the 2008 financial crisis. Sweden ended negative rates in 2019 while others ended in 2022.

In January, the most recent data available, the main inflation in Japan was 2.2%. The BoJ’s decision to increase the interest rate from -0.1 to the range of “Zero” to 0.1% moves towards normal interest rates.

Now, an increase in interest rate means making loans more expensive, which may have some impact on investments in already cash-strapped parts of the economy.

For many years the falling prices have put the economy in a downward cycle, the first step in the unwinding of this, is monetary stimulus measures that will put the economy on a self-sustaining path.

However, though investment, wages and prices are increasing in tandem, now consumption has to increase to achieve sustained economic growth.

The BoJ stated that it would not go for an aggressive tightening cycle and would keep an “accommodative” stance for the time being. BoJ has to navigate its policy with more caution.

The decline in the birth rate is a critical situation and by 2030 there will be a decline in the youth population. The Government estimated that the population will decline 30% by 2070 with 40% of the population will be over 65. The population is a still serious problem for Japan.

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