BOJ ends the world’s only negative rates regime in a landmark move

Japan’s central bank raised interest rates on Tuesday for the first time since 2007, ending the world’s only negative rates regime and other unconventional policy easing measures enacted over the course of the last few decades to combat deflation.

These changes mark a historic shift and represent the sharpest pull back in one of the most aggressive monetary easing exercises in the world, which was aimed at reflating prices in the Japanese economy. The BOJ’s actions also precede the U.S. Federal Reserve’s interest rate decision later this week.

“The likelihood of inflation stably achieving our target has been heightening … the likelihood reached a certain threshold that resulted in today’s decision,” BOJ Governor Kazuo Ueda said at a press conference after the central bank’s decision, according to a translation provided by Reuters.

The Bank of Japan though cautioned it’s not about to embark on aggressive rate hikes, saying that it “anticipates that accommodative financial conditions will be maintained for the time being,” given the fragile growth in the world’s fourth-largest economy.

“If the likelihood heightens further and trend inflation accelerates a bit more, that will lead to a further increase in short-term rates,” Ueda said. He added though there is still “some distance for inflation expectations to reach 2%.”

The BOJ raised its short-term interest rates to around 0% to 0.1% from -0.1% at the end of its two-day March policy meeting. Japan’s negative rates regime had been in place since 2016.

It also abolished its radical yield curve control policy for Japanese sovereign bonds, which the central bank has employed to target longer-term interest rates by buying and selling bonds as necessary.

The central bank though will continue purchasing government bonds worth “broadly the same amount” as before — currently about 6 trillion yen per month.

It would resort to “nimble responses” in the form of increased JGB purchases and fixed-rate purchases of JGBs, among other things, if there is a rapid rise in long-term interest rates.

Scaling back its asset purchases and quantitative easing, the BOJ said it would stop buying exchange-traded funds and Japan real estate investment trusts (J-REITS). It also pledged to slowly reduce its purchases of commercial paper and corporate bonds, with the aim of stopping this practice in about a year.

“As for the future, we will at some point eye shrinking our balance sheet given we’ve ended our extraordinary monetary easing. But we can’t specify now when that will happen,” Ueda told reporters.

He described the BOJ’s JGB and ETF holdings as “remnants of the extraordinary monetary easing scheme,” while deferring questions on the impact of the central banks’ unorthodox policies until an ongoing review is completed.