Japan’s central bank, the Bank of Japan (BOJ), made a significant move on Tuesday by raising interest rates for the first time since 2007, signaling the end of the world’s last negative interest rate policy. The decision came in response to early indications of robust wage gains in Japan this year.
As part of its policy shift, the BOJ raised its short-term interest rates from around -0.1% to approximately 0% to 0.1%. This move marks a departure from the negative rates regime that had been in place since 2016, signaling a shift towards more neutral monetary policy.
Additionally, the BOJ announced the abolition of its radical yield curve control policy for 10-year Japanese government bonds. This policy involved the central bank targeting longer-term interest rates by buying and selling bonds as needed.
Furthermore, the BOJ revealed its plans to cease purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITS), with a gradual reduction in its purchases of corporate bonds. The central bank aims to halt these asset purchases within approximately a year. However, it will continue to purchase Japanese government bonds at a similar rate as before.
This move represents a significant departure from the BOJ’s decades-old approach of employing radical policy measures, such as asset purchases and quantitative easing, to stimulate Japan’s economy. Despite “core core inflation” surpassing the 2% target for over a year, the BOJ had maintained its ultra-loose monetary policy stance, citing largely imported price increases as the primary reason.
There are encouraging signs of price growth that are emerging as more organic and sustainable in nature.
The ongoing “shunto” spring wage negotiations between Japan’s corporate sector and its unionized workers have yielded promising results. According to Rengo, Japan’s largest federation of trade unions, there has been a significant weighted average increase of 3.7% in base pay as a result of these negotiations. This uptick in wages surpasses last year’s gains, which were already the most substantial increase seen in three decades.
BOJ Governor Kazuo Ueda has consistently emphasized the importance of the outcomes of these annual “shunto” negotiations for fostering sustainable price increases. The Bank of Japan anticipates that higher salaries will stimulate domestic demand, creating a positive feedback loop that contributes to inflationary pressures. This virtuous cycle of increased wages leading to heightened domestic consumption is seen as a crucial factor in achieving sustained price growth in Japan’s economy.