Japan ends negative interest rate policy, raises key rate for 1st time since 2007

March 19, 2024 (MLN): The Bank of Japan has ended its negative interest rate policy that began in 2016 as it raised its key benchmark rate by 10 basis points (bps) from -0.1% to 0% for the first time since 2007.

The above-mentioned decision was made during the central bank's two-day monetary policy meeting held on March 18 and 19, 2024.

Furthermore, the Bank has decided to continue its JGB purchases with broadly the same amount as before.

In case of a rapid rise in long-term interest rates, it will make nimble responses by, for example, increasing the amount of JGB purchases and conducting fixed-rate purchase operations of JGBs, both of which can be done so regardless of the monthly schedule of JGB purchases and the Funds-Supplying Operations against Pooled Collateral.

On the other hand, the Bank has decided to discontinue purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs).

Moreover, the amount of purchases of CP and corporate bonds would be reduced and will be discontinued in about one year.

The Bank will provide loans under the Fund-Provisioning Measure to Stimulate Bank Lending, the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas, and the Funds-Supplying Operations to Support Financing for Climate Change Responses with an interest rate of 0.1% and a duration of one year.

Concerning the Fund-Provisioning Measure to Stimulate Bank Lending, the maximum amount of funds that each eligible counterparty can borrow will be equivalent to the net increase in its amount of outstanding loans.

Looking at the background conditions of wage developments, corporate profits have continued to improve and labor market conditions have been tight.

In this situation, as indicated by the results of this year's annual spring labor-management wage negotiations to date, wages will likely continue to increase steadily this year, following the firm wage increase last year.

Moreover, anecdotal information from firms, which is gathered through the Bank's Head Office and branches suggests that a wide range of firms have maintained their stance of raising wages.

On the price front, while the effects of a pass-through to consumer prices of cost increases led by the past rise in import prices have waned, services prices have continued to increase moderately, partly due to the moderate wage increases seen thus far.

As these recent data and anecdotal information have gradually shown that the virtuous cycle between wages and prices has become more solid, the Bank judged it came in sight that the price stability target would be achieved sustainably and stably toward the end of the projection period of the January 2024 Outlook Report.

The Bank of Japan Act states that the Bank's monetary policy should be aimed at "achieving price stability, thereby contributing to the sound development of the national economy."

Price stability is important because it provides the foundation for the nation's economic activity.

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