Saying goodbye to the era of negative interest rates, Japan raised interest rates for the first time in 17 years.

Reporter Chen Shenglong

On March 19th, the Bank of Japan announced that it would raise the short-term interest rate by 10 basis points to 0%, which is the first time that the Bank of Japan has raised interest rates since 2007. This means that Japan bid farewell to the negative interest rate era that lasted for eight years and became the last major economy in the world to abandon the negative interest rate policy.

At the same time, the Bank of Japan announced that it would withdraw from the yield curve control (YCC) policy and stop buying Japanese stock exchange traded funds (ETFs) and real estate investment trusts. However, the Bank of Japan said that it would continue to buy government bonds at roughly the same amount as before, and proposed to buy 400-550 billion yen of 5-10-year government bonds four times in April.

The Bank of Japan’s interest rate hike was basically in line with market expectations. At around 12:00 Beijing time, the Nikkei 225 index fell by 0.2% to 39,682.15.USD/JPY reported 149.87, which was basically the same as last day’s closing price.

Rengo, Japan’s largest trade union organization, announced last Friday that it had reached an agreement with the employers to raise the annual salary by 5.3%, 1.5 percentage points higher than the previous year, the biggest salary increase in 30 years. On Monday, the Nikkei Business News and other media quoted sources as saying that the Bank of Japan immediately conducted internal and external coordination on ending the negative interest rate policy after learning the above news. Prior to this, the Bank of Japan stressed that the rebound in wage growth is an important condition for inflation to continue to return to 2%. If a virtuous circle between wages and inflation can be confirmed, it will consider changing easing policies including negative interest rates.

Analysts pointed out that after the yen interest rate rises, Japanese investors’ preference for overseas assets may be weakened, thus pushing the global bond yield higher. But overall, the impact of Japan’s interest rate hike on global financial markets is moderate.

From deflation to moderate reflation

In the early 1990s, Japan’s real estate bubble burst, the stock market suffered a heavy blow, the unemployment rate rose, and the whole society fell into the low desire of deflation. After entering the 21st century, the Japanese government has implemented a series of stimulus policies, and only raised the policy interest rate in 2000, 2006 and 2007.

From 2001 to 2006, the Bank of Japan continued to buy a large number of government bonds and long-term bonds at extremely low interest rates, injecting liquidity into the banking system. In 2012, after Shinzo Abe was re-elected as prime minister, he tried to save the depressed Japanese economy by adopting ultra-loose monetary policy, loose fiscal policy and structural reforms to promote economic growth.

In 2016, the Bank of Japan announced that it would reduce the interest rate of excess reserve deposits of commercial banks from 0.1% to -0.1%, and since then Japan has entered the era of negative interest rates. However, it should be pointed out that the negative interest rate only applies to the current account of the Bank of Japan, not the personal deposit account.

The yield curve control (YCC) policy is also an unconventional monetary policy tool launched by the Bank of Japan in 2016. It aims to stimulate economic growth and push up inflation by setting a specific yield target for government bonds, especially maintaining the yield of 10-year government bonds at a level close to zero.

Abe’s "three arrows" have limited effect in boosting Japan’s economy, but it has made Japan’s monetary easing reach an unprecedented level. One of the consequences is the sharp depreciation of the yen against the US dollar. At present, the exchange rate of the US dollar against the Japanese yen is around 150, an increase of 72% compared with the end of 2012.

In 2022, due to the COVID-19 epidemic and the impact of international geopolitical tensions on the supply side, the prices of commodities such as oil rose sharply. In order to curb soaring inflation, major central banks around the world adopted a large-scale interest rate hike, the speed and extent of which was at least the highest in 20 years. According to the statistics of the Bank for International Settlements, in 2022, 38 central banks around the world raised interest rates 210 times, of which the Federal Reserve raised interest rates 7 times, with a cumulative increase of 425 basis points. In this process, the Bank of Japan still kept the short-term interest rate at -0.1%, but only relaxed the long-term interest rate change range from about 0.25% to about 0.50%. At that time, the governor of the Bank of Japan, Haruhiko Kuroda, believed that the price increase was a temporary phenomenon caused by the price increase of raw materials and other reasons, but in fact the inflation target was not realized.

The main reason for the Bank of Japan to make up its mind to withdraw from the negative interest rate policy this time is that the country’s inflation continues to exceed the inflation control target of 2%. According to the latest data, in January, Japan’s consumer price index (CPI) rose by 2.2% year-on-year, which slowed down for three consecutive months, but exceeded the Bank of Japan’s inflation target of 2% for 22 consecutive months.

The unexpected salary increase this year has further strengthened the confidence of the Bank of Japan. A substantial salary increase means that the real disposable income growth rate of residents is expected to turn positive, household consumption expenditure will increase, and Japan’s economy is expected to enter a more stable and sustained growth channel.