Higher inflation and growing wages indicate that the economy can thrive without the central bank’s active intervention.
On Tuesday, Japan’s central bank hiked interest rates above zero for the first time since 2007. This marks the end of an aggressive effort to support the economy, which has failed to develop.
In 2016, the Bank of Japan took the unusual step of lowering borrowing costs below zero, in an attempt to jump-start borrowing and lending and revive the country’s stagnant economy. Negative interest rates, which central banks in various European economies have also implemented, mean that depositors pay to leave their money with a bank, incentivize them to spend it instead.
However, Japan’s economy has recently began to show signals of greater growth: inflation, which had been low for years, has accelerated, bolstered by larger-than-normal pay rises. Both indicate that the economy may be on track for more persistent growth, allowing the central bank to tighten its interest rate policy years after other major central banks hiked rates quickly in reaction to an increase in inflation.
Even with Tuesday’s decision, Japan’s interest rates remain far lower than those of the world’s other major industrialized nations. The Bank of Japan lifted its target policy rate to zero to 0.1 percent from minus 0.1 percent.
The bank said in a statement Tuesday that it had found that the economy was in a “virtuous cycle” between wages and prices, which meant that salaries were rising enough to cover rising costs but not enough to reduce business profits. Japan’s headline inflation rate was 2.2 percent in January, according to the most recent figures available.
The central bank also abandoned programs in which it purchased Japanese government bonds, as well as funds that invest in real estate or follow stocks, in order to limit how high market interest rates could rise, encouraging businesses and households to borrow at low rates. The bank had gradually eased the policy throughout the previous year, resulting in higher debt yields as the country’s growth prospects improved.
The bank stated that negative interest rates and other measures it has implemented to support the economy “have fulfilled their roles.”
In many nations, a leap in inflation has plagued consumers and policymakers, but in Japan, which has frequently faced growth-sapping deflation, most economists applaud the recent price increase. The Nikkei 225 index recently broke a record high set in 1989, thanks to positive economic conditions and shareholder-friendly business reforms, attracting global investors. The Nikkei climbed 0.7 percent on Tuesday.
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