Japan’s central bank announced Tuesday the first hike in its benchmark interest rate in 17 years in a significant shift away from its longstanding policy of negative interest rates. The move, aimed at steering the world’s fourth-largest economy toward a more balanced growth trajectory, marks a pivotal moment for the Bank of Japan (BOJ).
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Policy Adjustment Amid Economic Indicators
At a policy meeting, the BOJ raised the short-term rate to a range of 0 to 0.1 per cent, up from the previous minus 0.1 per cent. This decision, the first rate hike since February 2007, underscores the bank’s confidence in the economy’s ability to sustain positive momentum. The decision aligns with the bank’s long-standing target of achieving a 2 per cent inflation rate, signaling a potential departure from deflationary trends.
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Factors Driving the Shift
One key factor influencing the policy shift is the recent trend of Japanese companies announcing substantial wage increases during negotiations with trade unions. Bank of Japan Chief Kazuo Ueda had emphasized the bank’s commitment to reviewing its negative rate policy once the inflation target was met, especially if accompanied by wage growth. This stands in contrast to the strategies pursued by the U.S. Federal Reserve and the European Central Bank, which have adjusted interest rates to counter inflationary pressures.
Cautious Approach to Further Adjustments
While the rate hike signals a significant departure from the ultra-lax monetary policy of the past, BOJ officials remain cautious about the pace of future adjustments. Analysts anticipate a gradual approach to further rate hikes, considering the potential impact on economic growth. The bank aims to ensure that any inflationary pressures are driven by sustainable domestic factors, rather than external influences.
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Continued Support for Economic Growth
Despite the shift in interest rate policy, the Bank of Japan remains committed to supporting economic growth through continued asset purchases and other easing measures. These measures, which include injecting liquidity into the economy through purchases of government bonds and other assets, will be adjusted according to prevailing economic trends.
(PTI, AP Inputs)
