Japan Ends its Negative Rates Policy After Eight Years

The Bank of Japan made a historic shift away from its unorthodox policy on Tuesday, ending eight years of negative interest rates and other unconventional measures aimed at reflating growth. This move marks Japan's first interest rate hike in 17 years but keeps rates around zero due to a fragile economic recovery.

The BOJ's decision to end negative rates was widely expected, with policymakers ditching the 0.1 percent charge on excess reserves that financial institutions held with the central bank since 2016. Instead, the BOJ set the overnight call rate as its new policy rate and will guide it within a range of 0 to 0.1 percent by paying 0.1 percent interest on deposits at the central bank.

While the rate hike holds symbolic significance, its actual impact on the economy is expected to be minimal. The BOJ will likely maintain loose monetary conditions to support economic recovery, and significant rises in funding costs or mortgage rates are not anticipated.

In addition to ending negative rates, the BOJ abandoned its yield curve control policy, which had capped long-term interest rates around zero since 2016. However, the central bank stated it would continue buying government bonds simultaneously and increase purchases if yields rise rapidly. Furthermore, the BOJ decided to discontinue purchases of risky assets like ETFs and Japanese real estate investment trusts.

With inflation surpassing the BOJ's 2 percent target for over a year, the decision to end negative rates was anticipated. Markets are now awaiting Governor Kazuo Ueda's post-meeting news conference for insights into the pace of further rate hikes.