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Bank of Japan ends world’s only negative interest rate regime in historic move, relinquishes control of yield curve

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An editorial montage of the Japanese flag and Japanese yen cash banknotes

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Japan’s central bank on Tuesday raised interest rates for the first time since 2007, ending the world’s only negative rate regime following early signs of a sharp rise in wages this year.

The Bank of Japan, however, warned that it was not about to embark on aggressive rate hikes, saying that it “expects accommodative financial conditions to be maintained for the time being.” given the fragile growth of the world’s fourth largest economy.

The BoJ raised short-term interest rates from -0.1% to around 0% to 0.1%, according to its report. statement at the end of his two-day political meeting in March. Japan’s negative rate regime had been in place since 2016.

The BoJ also abolished its radical yield curve control policy for Japanese sovereign bonds, which the central bank used to target long-term interest rates by buying and selling bonds as necessary.

The central bank will, however, continue to buy government bonds at a value “about the same” as before, currently around 6 trillion yen per month.

It would resort to “agile responses” in the form of an increase in J.G.B. purchases and fixed rate purchases of JGB, among others, in the event of a rapid rise in long-term interest rates.

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Tapering back its sweeping asset purchases and quantitative easing measures, the BoJ announced it would stop buying exchange-traded funds and Japanese real estate investment trusts (J-REITS). It also pledged to gradually reduce its purchases of commercial paper and corporate bonds, with the aim of ending the practice within about a year.

The changes mark a historic shift and represent the sharpest setback in one of the world’s most aggressive monetary easing exercises, the aim of which was to pull the Japanese economy out of its deflationary spiral.

THE Japanese yen weakened to 149.92 against the greenback, while the Nikkei The stock index oscillated between gains and losses following the BOJ’s decision. Yields on 10- and 30-year JGBs have fallen.

Financial markets have been repositioning over the past week as Japanese local news and preliminary results of wage negotiations fueled speculation that the BOJ could normalize rates a month early, ahead of its April meeting.

Inflation target in sight

The BoJ had barely moved from its ultra-loose monetary policy, despite “core inflation” – which excludes food and energy prices – exceeding its 2% target for more than a year, the decision-makers considering that the price increases were largely imported.

BoJ Governor Kazuo Ueda has repeatedly said the outcome of this year’s annual “shunto” wage negotiations will be key to sustainable price increases. The Bank of Japan expects higher wages to lead to a virtuous spiral, with domestic demand fueling inflation.

“Prices of services have continued to increase moderately, partly due to the moderate wage increases observed so far,” the BoJ said in a statement.

Bank of Japan abandons negative interest rate policy in 'monumental' move

“As these recent data and anecdotal information have gradually shown that the virtuous circle between wages and prices has become more robust, the Bank believed that it was becoming evident that the objective of price stability would be achieved in a sustainable and stable manner towards the end of the decade. projection period of the January 2024 outlook report,” he adds.

Ongoing spring wage negotiations between Japan Inc and its union workers have so far resulted in a 3.7% weighted average increase in base pay, Rengo, Japan’s largest labor federation, said in its statement on Friday. first provisional update.

That’s even more robust than last year’s gains, which represented the biggest increase in three decades.

This is a developing story. Please check for updates.

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