Japan Ends Negative Rate Policy as Deflation Fears Subside

Japan has officially ended its negative interest rate policy eight years after cutting its short-term policy rate to -0.1 percent in February 2016. Back then, the negative interest rate was introduced to supplement the policy of “Quantitative and Qualitative Monetary Easing” in the country’s long battle with deflation and subdued economic growth. Since the 1990s, Japan has repeatedly seen protracted periods with very low or negative inflation, forcing the country’s central bank to implement aggressive policies aiming to stimulate the economy and return to its 2-percent inflation target.

On Tuesday, after the conclusion of its two-day policy meeting, the Bank of Japan (BOJ) announced the landmark decision, its first rate hike since February 2007, after having seen enough evidence of core inflation stabilizing at or above the target level of 2 percent – the BOJ’s stated prerequisite for altering its policy stance. Specifically, it pointed towards the "virtuous cycle between wages and prices", which ultimately convinced policy makers that price stability could be achieved "in a sustainable and stable manner" over the next couple of years. Last Friday, the Japanese Trade Union Confederation, known as Rengo, had announced that this year's "shunto" spring wage negotiations resulted in average pay increases of 5.28 percent, the highest level in 33 years. Meaningful wage growth is considered key in the fight against deflationary pressures, as higher wages typically boost consumer demand and keep prices aloft.

Japan was the last major economy to employ a zero or negative interest rate policy, after central banks around the world had rapidly hiked rates to curb inflation in the wake of Russia’s invasion of Ukraine and global supply chain issues. For Japan, the latest surge in inflation was a welcome sign that its long battle with deflation was finally coming to an end. Tuesday's announcement was all but a "mission accomplished" statement as the BOJ said that its policy framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control and the negative interest rate policy had fulfilled its role in bringing price stability around the target level of 2 percent inflation. As of January 2024, the BOJ's preferred inflation gauge has exceeded the 2-percent mark for 22 months straight - making it the longest period of above-target inflation in the 21st century.