Bank of Japan sets new short-term rates

Following this announcement, the Bank of Japan (BOJ) has ended eight years of negative interest rates, as well as other remnants of its policy in order to shift its focus on development and growth. The overall economic recovery of the region forces the central bank to go slow in the process of further rising borrowing costs, thus keeping its rates around the 0 to 0.1% range. 

The shift is expected to provide Japan with the possibility to exist negative rates and end the capability of policymakers around the globe to focus on propping up on developments through cheap money and unconventional monetary tools. 

More information on the announcement

The Bank of Japan reverted to a normal monetary policy in order to target short-term interest rates. The financial institution will also focus on the overall trend of inflation across the globe. If it will heighten a bit more, the situation may lead to an overall increase in short-term rates. Further details on the pace or timing of rate hikes were not provided by officials of the financial institution. 

In addition, the Bank of Japan ditched a policy that was put in place in 2016, which was developed in order to apply a 0.1% charge on some excess that reserved banks and financial institutions partnered with the central bank. The BOJ also set the overnight call rate, as it represents its new policy rate. At the same time, the institution also decided to guide it in a range of 0-0.1% partly by paying 0.1% interest to deposits made at the central bank. 

The overall elimination of negative interest rates is set to focus on the Bank of Japan’s strategy of accelerating the development of the country and its financial landscape. The bank will continue to prioritise the process of remaining compliant with the regulatory requirements and laws of the industry while meeting the needs, preferences, and demands of its customers at the same time. 

The Bank of Japan also abandoned the yield curve control (YCC), a policy that was launched in 2016 in order to cap long-term interest rates around 0. The institution also discontinued purchases of risky assets. In addition, BOJ is expected to keep buying approximately the same amount of government bonds and ramp up purchases in case yields rise in a rapid manner. This process is set to underscore its focus on preventing any damaging spike from happening in borrowing costs.

Following this decision, the Japanese shares rose and the JPY fell below 150 per USD, while investors took the BOJ’s guidance as a sign that the interest rate differential between Japan and the US will not narrow much.