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Japan raises rates for the first time in 17 years and ends the era of negative rates

MADRID, 19 Mar.

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Japan raises rates for the first time in 17 years and ends the era of negative rates


The Policy Council of the Bank of Japan has decided at its meeting this Tuesday to raise the short-term reference rate to a range of 0% to 0.1% in what represents the first increase in the country's interest rates since 2007 and the end of the era of negative rates, applied since 2016, as announced by the entity.

The decision, adopted by a majority of 7 votes in favor against 2 against, will mean that the institution "will encourage the unsecured overnight interest rate to remain between 0 and 0.1 percent", compared to the previous - 0.1%, for which the Bank of Japan will apply an interest rate of 0.1% to current accounts starting March 21, 2024.

Likewise, the entity has also decided to end control over the yield curve of ten-year sovereign bonds, another measure implemented since 2016 within the framework of its quantitative and qualitative easing (QQE) policy, which according to the entity "has fulfilled its function."

"The Policy Council of the Bank of Japan evaluated the virtuous circle between wages and prices and considered that it was clear that the price stability target of 2% would be achieved in a sustainable and stable manner by the end of the Report's projection period January 2024 Outlook," the Japanese institution has indicated.

On the other hand, the Bank of Japan has announced that it will continue with its bond purchases "for approximately the same amount as before", ensuring that, in the event of a rapid increase in long-term interest rates, it will take agile responses, including the possibility of increasing the amount of debt purchases.

However, the institution has decided to abandon its purchases of other assets, such as exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITs), while it will gradually reduce the amount of corporate bond purchases with the aim of finish them in approximately one year.

Despite the historic rate hike agreed on Tuesday, the Bank of Japan has stressed that given the current outlook for economic activity and prices, it anticipates that accommodative financial conditions will remain for the time being.

"The Bank of Japan today ended more than a decade of ultra-loose policies, but we do not believe it will raise its interest rate further in the coming months," says Marcel Thieliant, head of Asia Pacific at the consulting firm Capital Economics.

In its macroeconomic analysis, the Bank of Japan considers it likely that the country's economy will continue to recover moderately for the moment, supported by factors such as the realization of pent-up demand, although it is expected to be under downward pressure from a slowdown in the pace of recovery of foreign economies.

Thus, as the virtuous cycle from income to spending gradually intensifies, Japan's economy is expected to continue growing at a rate higher than its potential growth rate.

For its part, it anticipates that the year-on-year increase rate of the reference CPI (excluding fresh foods) will exceed 2% until fiscal year 2024, due to base effects, including a decrease in the effects of the Government's economic measures that reduced inflation from the previous year.

"Thereafter, the rate of increase is expected to slow due to the dissipation of these factors," while the core CPI is expected to gradually rise towards the price stability target, as the output gap becomes positive and medium and long-term inflation expectations and increased wage growth.

In this sense, last week the Confederation of Japanese Trade Unions, known as Rengo, the largest union force in the country, with around 7 million members, announced that its associates have agreed on an average salary increase of 5.28% for the year. fiscal 2024, which marks the first time since 1991 that the committed increase in remuneration will exceed 5%.

"We believe that next year's negotiations will result in smaller wage increases. And now that the momentum behind consumer price gains is clearly weakening, we do not expect further increases in official interest rates," Capital Economics said. , Marcel Thieliant.