kathmandu | The Bank of Japan (BOJ) announced on Tuesday that it has put an end to its negative interest rates and other unconventional policies after 17 years, marking a historic shift away from a decade-long massive monetary stimulus.
This move signals the end of an era where central banks worldwide attempted to boost growth through cheap money. “Today, the BOJ has taken its first, tentative steps towards policy normalization,” said Frederic Neumann, Chief Asia Economist at HSBC in Hong Kong.
The policy in place since 2016, which charged financial institutions 0.1% on some excess reserves parked with the central bank, has been discontinued. Instead, the BOJ has introduced a new policy rate, setting the overnight call rate in a range of 0-0.1% and providing a 0.1% interest on deposits at the central bank.
Also Read
While this move has been anticipated, the BOJ emphasized its caution, stating that further rate hikes might be limited due to concerns about disrupting economic recovery and exacerbating deflationary pressures.
Japanese shares experienced volatility on Tuesday, with the yen falling to nearly 150 per dollar as investors interpreted the BOJ’s dovish guidance as a sign that interest rate differentials between Japan and the United States would remain wide.
The BOJ’s decision to end negative rates could have significant implications, including the potential impact on Japan’s massive public debt, the largest among advanced economies. Additionally, it could prompt Japanese investors to repatriate funds, affecting global financial markets.
Also Read
Under the leadership of former Governor Haruhiko Kuroda, the BOJ had implemented massive stimulus programs since 2013 to achieve a 2% inflation target. However, tepid inflation and public criticism led to adjustments in monetary policy, including the introduction of negative rates and yield curve control in 2016.
The removal of negative rates reflects the BOJ’s confidence in Japan’s economic recovery from deflationary pressures. However, the central bank remains cautious about the pace of further rate hikes, mindful of potential risks to economic stability.