Japan’s central bank raises interest rates for first time since 2007: ‘treading on thin ice’

Japan’s central bank pulled the plug on Tuesday on its ultra-aggressive monetary stimulus programme, hiking rates for the first time since the global financial crisis.

The Bank of Japan’s outlier policy of negative rates and massive asset purchases was aimed at jump-starting economic growth and price rises after the “lost decades” of stagnation and deflation.

But on Tuesday, following months of speculation, the BOJ finally changed its policy rate range from -0.1 per cent to between zero and 0.1 per cent, in its first hike since 2007.

Officials “assessed the virtuous cycle between wages and prices” and concluded that “the price stability target of two per cent would be achieved in a sustainable and stable manner”, it said.

The move will make loans more expensive for consumers and businesses, but banks will be able to earn more money from lending.

It will also increase Japan’s bill for servicing the national debt, which at around 260 per cent of national output is one of the world’s highest.

The BOJ also called an end to other unorthodox policies, including its yield curve control programme, which allows bonds to move in a tight band, and the purchase of exchange-traded funds because they had “fulfilled their roles”.

But it said it would keep buying long-term government bonds.

Taro Saito, senior economist at NLI Research Institute, said the move was a “great step for the BOJ towards normalisation of its monetary policy it has long craved for”.

The US Federal Reserve and other central banks raised rates to rein in inflation after Russia’s 2022 invasion of Ukraine.

But despite inflation also exceeding four per cent at one point, the BOJ kept its main rate below zero, where it has been since 2016.

Because negative interest rates mean