By T. Jayani, JadeTimes News
Japan's central bank has increased borrowing costs for just the second time in 17 years, aiming to normalize monetary policy in the world's third largest economy. The Bank of Japan (BoJ) raised its key interest rate to "around 0.25%" from the previous range of 0% to 0.1%. Additionally, it outlined plans to unwind its extensive bond buying program, signaling a gradual retreat from a decade of stimulus measures.
This decision comes shortly before the US Federal Reserve's upcoming interest rate announcement and an anticipated announcement from the Bank of England on Thursday.
Stefan Angrick, a senior economist at Moody's Analytics, noted, "The rate hike was widely expected after domestic media reported the decision ahead of time on Tuesday night. However, the move contrasts sharply with recent poor economic data and the absence of demand driven inflation." Official figures indicated that Japan's economy contracted by an annualized 2.9% from January to March, while consumer prices in June rose by a lower than expected 2.6% compared to the previous year.
Frederic Neumann, Chief Asia Economist at HSBC, commented, "Despite weak consumer spending, monetary officials made a decisive statement by raising interest rates and allowing for a gradual reduction of the balance sheet. Unless there are significant disruptions, the BoJ is likely to tighten further, with another interest rate hike expected by the beginning of next year."
In March, the BoJ increased borrowing costs for the first time since 2007, which resulted in the elimination of negative interest rates worldwide. In 2016, the BoJ had cut its main interest rate below zero in an effort to stimulate Japan's stagnating economy. Negative interest rates, which require depositors to pay to keep money in the bank, have been used by several countries to encourage spending rather than saving.
During the pandemic, central banks globally reduced interest rates to mitigate the negative effects of border closures and lockdowns. Countries such as Switzerland and Denmark, along with the European Central Bank, implemented negative interest rates. Since then, central banks including the US Federal Reserve and the Bank of England have raised interest rates to combat soaring prices.
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