Japan Increases Interest Rates For The First Time In 17 Years. The Bank of Japan has hiked borrowing costs for the first time in 17 years.
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The Bank of Japan (BOJ)
The Bank of Japan (BOJ) has initiated a significant change, raising its key interest rate from the previous -0.1% to a range of 0%-0.1%. This move comes amidst a surge in wages following an uptick in consumer prices.
Back in 2016, the bank had resorted to pushing rates below zero in efforts to revitalize the country’s sluggish economy.
This rate hike marks a milestone, as there are no longer any countries maintaining negative interest rates. Negative rates imply that individuals are required to pay for depositing money in banks, a strategy employed by various nations to incentivize spending rather than saving.
Moreover, the BOJ has opted to abandon its yield curve control (YCC) policy, which involved purchasing Japanese government bonds to regulate interest rates.
In its statement announcing the decision, the BOJ asserted its commitment to maintaining government bond purchases at a similar level as before, with the possibility of increasing purchases in the event of rapid yield spikes.
Anticipation for a rate increase had been mounting, particularly since Governor Kazuo Ueda assumed office in April of the preceding year.
Recent official data revealed that despite a deceleration in the rate of price escalation, Japan’s core consumer inflation remained steady at the BOJ’s 2% target in January.
The decision to finally raise rates pivoted on major corporations in the country raising wages for employees to counter the escalating cost of living, according to Nobuko Kobayashi of consulting firm EY-Parthenon.
Earlier this month, Japan’s largest companies consented to a substantial salary increase of 5.28% – the most significant in over three decades. Wages in Japan had stagnated since the late 1990s amidst sluggish consumer price growth or even deflation.
However, the resurgence of inflation could yield both positive and negative ramifications for the economy, cautioned Ms. Kobayashi. Productivity and domestic demand stimulation are favorable outcomes, whereas externally-driven inflation stemming from factors like conflict and supply chain disruptions poses risks.
Looking ahead, the BOJ has signaled a pause on further rate hikes for now, foreseeing the persistence of accommodative financial conditions. Marcel Thieliant of Capital Economics predicts that with inflation tapering off, trade unions may advocate for smaller pay increases in forthcoming negotiations.
0.4% Increase in Gross Domestic Product (GDP)
In February, Japan’s primary stock index, the Nikkei 225, reached an unprecedented closing high, surpassing the previous record set 34 years ago. Revised data indicated a 0.4% increase in gross domestic product (GDP) in the final quarter of 2023 compared to the previous year.
During the pandemic, central banks globally slashed interest rates in attempts to mitigate the adverse effects of border closures and lockdowns. Some countries, including Switzerland and Denmark, along with the European Central Bank, even implemented negative interest rates.
However, in subsequent periods, central banks like the US Federal Reserve and the Bank of England have aggressively raised interest rates to counteract surging prices.
