Bank of Japan prepares to end negative interest rate policy

Bank of Japan prepares to end negative interest rate policy

The Bank of Japan is preparing to put an end on Tuesday to eight years of negative interest rates and other measures of its ultra-expansive policy, taking a historic turn away from the attempt to reactivate the growth of the economy with years of gigantic monetary stimuli.

While the move would mark Japan's first interest rate hike in 17 years, it would still keep rates stuck around zero as a fragile economic recovery forces the central bank to curb any further rise in borrowing costs, analysts say. .

The move would make Japan the latest central bank to ditch negative rates and end an era in which authorities around the world sought to shore up growth through cheap money and unconventional monetary tools.

While most economists surveyed earlier this month expected the Bank of Japan (BoJ) to wait until April to end negative rates, sources say the larger-than-expected wage increases announced by big companies last week The chances now increase that the entity will make that decision at the end of its meeting on Tuesday.

If the nine-member board believes conditions are right, the BoJ will set the overnight interest rate as its new target and guide it in a range of 0-0.1%, paying 0.1% interest. on the excess reserves that financial institutions deposit in the central bank.

“What we expect overall is a return to a much simpler policy framework that focuses on targeting the front” of the yield curve, said Izumi Devalier, head of Japanese economics at BofA Securities.

“This would be the first rate hike in 17 years, so it has symbolic meaning. But the real impact on the economy is very small,” he said, noting that the BoJ will likely stick to its resolve to maintain ultra-loose monetary conditions. .

By exiting its negative rate policy, the Bank of Japan will also abandon its control over bond yields and suspend purchases of risky assets such as exchange-traded funds (ETFs), sources told Reuters, formally ending the radical monetary experiment launched by former governor Haruhiko Kuroda since 2013.

There is still a possibility that the BoJ will wait until April if a majority on the governing board sees the need to examine more data before making the decision.

A poll in March showed that 35% of economists expected the BoJ to end negative rates at the two-day meeting that ended Tuesday, up from 7% a month earlier, but still below the 62% who planned such action at its subsequent meeting on April 25.

With the end of negative rates considered almost a given, market attention will be focused on any clues that the Bank of Japan may give on the pace of interest rate increases thereafter.