The Bank of Japan on Tuesday ended unorthodox monetary easing steps of the past decade, scrapping its negative interest rate policy and yield cap program, convinced by robust wage growth leading toward its long-elusive 2 percent inflation goal.
In its first rate hike since 2007, the BOJ decided to guide short-term interest rates within a range of zero percent and 0.1 percent, but said financial conditions will remain "accommodative." The decision made the BOJ the last among major central banks to terminate the negative rate policy.
The Policy Board said the Japanese central bank will dismantle its program to keep long-term interest rates at rock-bottom levels, allowing them to be determined by market forces unless they spike. The bank will also discontinue buying exchange-traded funds.
The symbolic move signals that the dovish BOJ is gravitating toward policy normalization, which analysts still expect to be slow at best.
"Unprecedented monetary easing is now over," BOJ chief Kazuo Ueda told a press conference after a two-day monetary policy meeting.
Asked how fast and far the BOJ would raise interest rates, Ueda said that depends on economic and price situations. "Based on the outlook that we have at the moment, rapid increases will be avoided," he added.
After the BOJ announcement, the yen slipped past the psychologically important 150 mark against the U.S. dollar, and the benchmark yield on 10-year Japanese government bonds fell to 0.725 percent, still below the BOJ's rough upper limit of 1.0 percent set as part of its yield curve control program.
Prime Minister Fumio Kishida, who views Japan as seizing a rare opportunity to overcome deflation, described the BOJ's move as "appropriate," and said the government will continue to work closely with the central bank.
The departure from the negative rate policy means higher borrowing costs for companies and households but a boost in the profitability of commercial banks and other financial institutions.
The development came as policymakers were heartened by strong wage growth at this year's annual wage negotiations between labor unions and management, a key event that Ueda had signaled would prompt a policy change. Still, the decision at the end of the monetary policy meeting was not unanimous, with two of the nine board members opposed.
Former Governor Haruhiko Kuroda, whose 10-year tenure ended last year, led the BOJ into uncharted territory with a slew of monetary stimulus steps to achieve the 2 percent inflation target.
Since 2016, the BOJ has set short-term interest rates at minus 0.1 percent, making it less attractive for financial institutions to leave excess funds at the central bank. The goal was to prompt commercial banks to increase lending and investment in order to rejuvenate the economy.
"It has come into view that our 2 percent price stability target can be achieved sustainably and stably, with a virtuous cycle of pay and price increases confirmed to be in motion," Ueda said.
Major companies such as Toyota Motor Corp. and Nissan Motor Co. said recently they had decided to offer their largest pay hikes in decades during the management-union talks.
Ueda said smaller firms will likely follow suit in realizing higher pay growth, adding that the broadening of price hikes in the services sector, a proactive stance on investment among Japanese firms, and an improvement in consumer sentiment were also factored into the latest decision.
The policy framework of a negative rate and yield curve control has "fulfilled" its objectives, the BOJ said in a post-meeting statement.
It will not stop buying Japanese government bonds immediately to prevent a surge in bond yields that would be detrimental to the economy.
"We have government bonds and ETFs that we've bought in the past on our balance sheet, so the legacy of our unprecedented monetary easing will remain for the time being," Ueda said.
While cost-push inflation was a trigger, the higher-than-expected, average 5.28 percent pay hike offered by Japanese firms in the wage talks, had boosted market expectations that the BOJ would act this time, rather than in the next policy meeting in April.
Yuichi Kodama, chief economist at Meiji Yasuda Research Institute, said the BOJ took "all possible steps that it could take now to normalize policy."
"Governor Ueda would want to avoid a scenario in which higher interest rates take their toll on households, so there is a reason to be careful." he said, adding that short-term interest rates can be raised to 0.5 percent in 2025.
The BOJ expects the Japanese economy to continue to recover moderately, though economists point to weak domestic demand, especially private consumption.
The BOJ's persistence with ultralow rates sharply weakened the yen as its global counterparts rushed to raise rates to fight surging inflation.
A weak yen cuts both ways, as it boosts import costs for resource-scarce Japan but can be a boon to exporters by inflating their overseas earnings in yen terms.
The Federal Reserve is scheduled to hold a two-day policy-setting meeting starting Tuesday, and analysts expect it to start cutting rates sometime this year.
The following is a chronology of major events related to the Bank of Japan's monetary policy.
February 2007 -- BOJ raises policy rate to 0.5 percent from 0.25 percent.
October 2008 -- BOJ cuts interest rate to 0.3 percent after U.S. investment bank Lehman Brothers Holdings Inc. collapses.
October 2010 -- BOJ shifts to zero interest rate policy by guiding overnight call rate within range of zero percent and 0.1 percent.
March 2013 -- Haruhiko Kuroda becomes BOJ chief.
April 2013 -- BOJ introduces "quantitative and qualitative easing" as part of "Abenomics" policy mix. It vows to double monetary base by aggressive asset purchases and raise inflation to 2 percent over next 2 years.
January 2016 -- BOJ adopts negative interest rate.
September 2016 -- BOJ adopts "yield curve control," focusing on controlling interest rates after "comprehensive" review.
July 2018 -- BOJ decides to allow long-term interest rates to rise above de facto ceiling, move in wider range.
March 2021 -- BOJ decides to allow long-term interest rates to move up or down by 0.25 percentage point.
December 2022 -- BOJ decides to allow long-term interest rates to trade between minus 0.5 percent and 0.5 percent.
April 2023 -- Academic Kazuo Ueda begins his five-year term as BOJ governor.
July 2023 -- BOJ decides to allow long-term interest rates to trade toward 1.0 percent.
October 2023 -- BOJ decides to allow long-term interest rates to rise above 1.0 percent.
March 19, 2024 -- BOJ ends negative rate policy and yield curve control.
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