In an ambitious attempt to boost an economy that has long struggled to develop, Japan’s central bank hiked interest rates on Tuesday for the first time since 2007, moving them beyond zero.
In an unconventional attempt to stimulate lending and borrowing and boost the nation’s flagging economy, the Bank of Japan reduced borrowing costs to zero in 2016. Negative interest rates, which some central banks in European economies have also implemented, force depositors to pay a fee for keeping their money in a bank and provide borrowers with extremely low interest rates, which encourages them to spend.
However, Japan’s economy has just started to show signals of faster growth: after years of low inflation, the country has experienced faster-than-usual wage increases. Both indicate that the economy might be headed towards longer-term growth, which would allow the central bank to tighten policy years after other major central banks did the same in reaction to sharp increases in inflation.
Japan’s interest rates are far lower than those of the other major industrialised economies in the world, even following the change on Tuesday. The target policy rate set by the Bank of Japan was increased from minus 0.1 percent to zero to 0.1 percent.
In a statement on Tuesday, the bank stated that it had come to the conclusion that prices and salaries were in a “virtuous cycle” in which wages were rising just enough to keep up with inflation but not to the point where they were reducing company earnings. According to the latest available data, Japan’s main inflation rate in January was 2.2%.
Additionally, the central bank abandoned its policy of purchasing Japanese government bonds, real estate investment funds, and stock index funds in order to limit the maximum amount of interest rates that could be charged on the market and encourage both individuals and companies to take out loans. Over the course of the previous year, the bank gradually eased the policy, which led to an increase in debt yields as the nation’s growth prospects brightened.
The bank declared that its other economic stimulation measures, including negative interest rates, “have fulfilled their roles.”
