• The decision follows a surge in wages and an increase in consumer prices.
• The decision was based on major corporations increasing wages for their workers to manage the escalating cost of living.
• The country’s main stock index, the Nikkei 225, achieved an all-time closing high in February.

For the first time in 17 years, Japan’s central bank, the Bank of Japan (BOJ), has raised the cost of borrowing. It increased its key interest rate from -0.1% to a range of 0%-0.1%, reflecting a significant shift. This decision follows a surge in wages after an increase in consumer prices. In 2016, the bank had slashed the rate below zero in a bid to stimulate the country’s stagnating economy. As a result of this hike, there are no longer any countries maintaining negative interest rates.

When negative rates are in force, individuals are required to pay to deposit money in a bank. Several countries have utilized this approach to encourage spending rather than saving. Additionally, the BOJ abandoned a policy called yield curve control (YCC), which involved the bank purchasing Japanese government bonds to regulate interest rates.

Critics have denounced the YCC policy, in place since 2016, for distorting markets by preventing long-term interest rates from increasing.

The BOJ, in a statement announcing the decision, declared its intention to maintain the purchase of “broadly the same amount” of government bonds as before and to increase purchases in the event of rapid yield rises. Expectations for the BOJ to raise rates had been increasing since Governor Kazuo Ueda assumed office in April of the previous year.

The latest official figures revealed that, despite a slowdown in the rate of price rises, Japan’s core consumer inflation remained steady at the bank’s 2% target in January. The decision to ultimately raise rates depended on major corporations in the country increasing wages for their workers to assist them in managing the escalating cost of living, as stated by Nobuko Kobayashi from consulting firm EY-Parthenon to the news.

Earlier this month, Japan’s biggest companies announced a 5.28% increase in salaries – marking the largest wage hike in over three decades.

Wages in the country had remained stagnant since the late 1990s, even as consumer prices experienced minimal growth or declined. However, the resurgence of inflation could bring both positive and negative implications for the economy, according to Ms. Kobayashi.

“Good, if Japan can stimulate productivity and domestic demand. Bad, if inflation stays externally driven by things like war and supply chain disruptions.”

Looking ahead, the BOJ has indicated that it will not implement further rate hikes for now, foreseeing the maintenance of “accommodative financial conditions for the time being.”

“With inflation coming off the boil now, it seems likely that trade unions will push for smaller pay hikes in next year’s talks,” wrote Marcel Thieliant of research firm Capital Economics.

“With wage growth peaking this year, we still expect inflation to fall below the BOJ’s target by the end of the year so the Bank won’t feel the need to lift its policy rate any further.”

In February, Japan’s main stock index, the Nikkei 225, achieved an all-time closing high, surpassing the previous record set 34 years ago.

This month, the country managed to avoid slipping into a technical recession after revising its official economic growth figures.

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