Bank of Japan Ends Negative Rates in First Hike Since 2007, Scraps Yield Curve Control

The Bank of Japan on Tuesday ended eight years of negative interest rates and dismantled its yield curve control framework, delivering the first policy rate increase since February 2007.

Meeting in Tokyo, the Policy Board voted by seven to two to raise the short-term policy rate, guiding the uncollateralised overnight call rate to a range of around 0 to 0.1%, up from the previous minus 0.1% applied to a portion of commercial banks' reserves at the central bank. The new guideline and the 0.1% interest rate on current account balances will be effective from 21 March. The Board also formally abolished yield curve control and discontinued purchases of exchange-traded funds and Japan real estate investment trusts, while saying it would continue to buy Japanese government bonds at broadly the same pace as before, around ¥6 trillion per month.

BOARD SAYS WAGE-PRICE CYCLE HAS BECOME MORE SOLID

In the statement accompanying the decision, the Bank said it judged that the virtuous cycle between wages and prices had become more solid, that it had come in sight that the price stability target of 2% would be achieved in a sustainable and stable manner toward the end of the projection period of its January 2024 Outlook Report, and that the framework of Quantitative and Qualitative Monetary Easing with yield curve control and the negative interest rate policy had fulfilled their roles.

UEDA PROMISES ACCOMMODATIVE STANCE

Speaking at the press conference that followed the decision, Governor Kazuo Ueda stressed that financial conditions would remain accommodative. The Bank's statement said: "Given the current outlook for economic activity and prices, the Bank anticipates that accommodative financial conditions will be maintained for the time being." Ueda declined to commit to a timetable for further increases, saying that policy adjustments would be guided by incoming data and that there was still some distance to travel before the 2% price stability target could be judged durably achieved.

SPRING WAGE NEGOTIATIONS

The decision followed the results of the spring wage negotiations, or shunto, released on Friday by Rengo, the country's largest labour federation. The first tally showed average wage increases of 5.28%, up from 3.80% a year earlier. Ueda cited the shunto result explicitly, saying it had given the Board the confidence that wage growth was feeding through into sustained underlying inflation rather than reflecting one-off cost pass-through.

Two members of the nine-strong Policy Board dissented: Toyoaki Nakamura wanted to confirm that small and medium-sized firms' capacity to raise wages had improved, while Asahi Noguchi warned that ending yield curve control and negative rates at the same time risked a discontinuous change in financial conditions.

TEN-YEAR JGB YIELD

The yield on the ten-year Japanese government bond, the former anchor of yield curve control, traded close to 0.74% after the announcement.

OUTLOOK DUE AT APRIL MEETING

The Policy Board's next meeting is scheduled for 25–26 April, when the Bank will publish its Outlook for Economic Activity and Prices, its first full set of projections under the new policy framework.