The Bank of Japan has made a significant move by raising interest rates for the first time since 2007, marking the conclusion of its prolonged stint with negative rates. This decision positions Japan as the last major economy to exit this policy, signifying a shift away from the deflationary trends that have characterized its economy for decades.
With a decisive 7-2 majority vote, the BoJ announced its intention to maintain the overnight interest rate within the range of approximately 0 to 0.1 percent. Concurrently, the central bank will sustain its current level of Japanese government bond purchases.
This anticipated decision aligns with recent developments in Japan's economic landscape. A substantial increase in wages, the most significant since 1991, has bolstered confidence within the BoJ that mild inflationary pressures will persist. Moreover, broader indicators, such as the Nikkei 225 stock index surpassing its level from 34 years ago, reflect a shifting tide in the Japanese economy. As companies increasingly pass on inflation-related costs to consumers and labor shortages drive up wages, signs of change are becoming more pronounced.
However, the BoJ's commitment to maintaining Japanese government bond purchases highlights the underlying fragility of the economy, particularly evident in subdued household consumption. Despite inflation being propelled by surging energy and food prices, core inflation, excluding volatile food prices, has decelerated for the third consecutive month as of January.
While the return to positive interest rates is a significant milestone, economists anticipate that rates will remain exceptionally low for the foreseeable future. BoJ officials have indicated that this initial increase does not herald a rapid succession of rate hikes, underscoring the cautious approach towards monetary policy adjustments.
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