Japan: Central Bank hikes rates for first time since financial crisis

Japan’s central bank has broken from its long-standing ultra-aggressive monetary stimulus program, opting to hike rates for the first time since the global financial crisis.

The Bank of Japan (BoJ), renowned for its outlier policies of negative rates and massive asset purchases, aimed to revitalize economic growth and combat deflation after decades of stagnation.

However, on Tuesday, the BoJ signaled a significant shift, adjusting its policy rate range from -0.1 percent to between zero and 0.1 percent, marking its first rate increase since 2007.

The decision, fueled by months of speculation, was motivated by the BoJ’s assessment of the “virtuous cycle between wages and prices,” believing that the two percent price stability target could be achieved sustainably.

While this move may bolster banks’ profits from lending, it will also raise borrowing costs for consumers and businesses, impacting Japan’s national debt servicing, already one of the highest globally at around 260 percent of national output.

Furthermore, the BoJ announced the cessation of other unconventional policies, including its yield curve control program and the purchase of exchange-traded funds, deeming them fulfilled in their roles. Nonetheless, the BoJ will continue purchasing long-term government bonds.

Economists like Taro Saito, a senior economist at NLI Research Institute, hailed this move as a significant step towards the normalization of the BoJ’s monetary policy, long-awaited by the institution.

The decision diverges from actions taken by the US Federal Reserve and other central banks, which raised rates to curb inflation following geopolitical tensions, including Russia’s 2022 invasion of Ukraine.

Despite inflation surpassing four percent, the BoJ maintained its main rate below zero since 2016, intending to incentivize banks to lend to businesses.

The impact of this decision has been multifaceted. While it has weakened the yen against the dollar, benefiting exporters, it has also increased import costs, affecting consumers negatively. The yen fell below 150 per dollar, while stocks surged as the BoJ’s assurance of accommodative conditions dampened expectations of further hikes.

Regarding the BoJ’s cautious approach, Saito emphasized the necessity of clearer signs indicating economic improvement before the institution takes further steps, suggesting that wage hikes and sustained domestic demand are critical factors.

However, Moody’s analyst Stefan Angrick cautioned against the BoJ’s haste, citing the uncertainty surrounding broader pay gains and domestic demand strength. Angrick warned of potential economic downturns, highlighting the BoJ’s delicate balancing act and the need to tread cautiously.

As Japan braces for this pivotal monetary shift, the BoJ’s decision signals both optimism and caution, navigating uncharted waters in a bid to steer the nation’s economy towards stability and growth.