The Bank of Japan (BOJ) has announced an increase in its overnight call rate to a range of 0 to 0.1%, marking the central bank's first interest rate hike in 17 years.
According to a post by the World Economic Forum, this increase brings an end to an eight-year period of negative interest rates and reverses a policy that imposed a 0.1% charge on some excess reserves held by financial institutions at the central bank.
"We reverted to a normal monetary policy targeting short-term interest rates, as with other central banks," BOJ Governor Kazuo Ueda was quoted as saying during a press conference by the World Economic Forum. "If trend inflation heightens a bit more, that may lead to an increase in short-term rates."
A news report by The Associated Press indicated that the BOJ used a 2% inflation target as a benchmark to determine if it had "escaped deflationary tendencies." Despite recent data suggesting inflation is near that rate, the central bank approached reversing the negative borrowing rates with caution.
The AP also provided insight into why this reversal is happening now: "We made the decision because we foresaw stable and continuous 2% inflation," Ueda was quoted as stating. The report also highlighted improvements in corporate wages and profits, noting that Japanese businesses have announced plans for significant wage increases in 2024 following negotiations with trade unions.
An S&P Global Market Intelligence report suggests that Japan’s large banks are likely welcoming the return to rate increases as it enables them to pass on higher rates to their customers. "We will be returning to a world of positive interest rates," Hironori Kamezawa, chief executive of Mitsubishi UFJ Financial Group, was quoted as saying at an earnings press conference in November 2023. "We are seeing light at the end of the long deflationary tunnel."