BOJ Hikes Interest Rates For First Time In 17 Years

The Bank of Japan raised interest rates for the first time in 17 years on Tuesday, with short-term interest rates raised by ten basis points to 0%. The bank stated that while it will continue to buy Japanese government bonds at a “steady” pace, it will cease purchases of exchange-traded funds and real estate investment trusts.

The Bank of Japan also stated that it will keep the overnight interest rate in the range of 0% to 0.1%, and apply an interest rate of 0.1% to current account balances held by financial institutions at the bank. Additionally, the Bank of Japan indicated that it will gradually reduce its purchases of commercial paper and corporate bonds, aiming to halt purchases within a year, marking the end of the bank’s yield curve control policy.

This move comes just weeks after Japanese labor unions secured significant wage increases from employers for this year, while data showed that Japanese inflation remained steady and the economy barely escaped recession in the fourth quarter.

Analysts were largely divided over whether such a move would occur in March or April, although proponents of a rate hike in March said recent developments in the Japanese economy had given the Bank of Japan sufficient impetus to begin tightening policy. The Japanese economy narrowly avoided recession in the fourth quarter of 2023, giving the Bank of Japan more confidence to start tapering its ultra-cautious policy.

The Bank of Japan noted some weakness in the Japanese economy now, but increased wages are likely to stimulate consumption in the coming months. A decline in personal consumption had a significant impact on the Japanese economy during the second half of 2023, but strong business spending helped the country avoid recession.

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