The Bank of Japan (BOJ) is poised to end eight years of negative interest rates and other unconventional monetary policies on Tuesday. This historic shift signals a departure from the central bank's focus on stimulating growth through massive monetary stimulus.
While the move marks Japan's first interest rate hike in 17 years, it will still keep rates near zero. Analysts attribute this cautious approach to the fragile economic recovery, which necessitates a gradual increase in borrowing costs.
The BOJ's decision aligns with a global trend of central banks abandoning negative rates. It marks the end of an era where policymakers relied on cheap money and unconventional tools to bolster growth.
Despite expectations that the BOJ would wait until April to end negative rates, recent pay hikes announced by major firms have increased the likelihood of an earlier decision. If the nine-member board deems conditions favorable, the BOJ will set a new target for the overnight call rate within a range of 0-0.1%.
Upon exiting negative rates, the BOJ will also discontinue its bond yield control and risky asset purchases. This move formally concludes the radical monetary experiment implemented by former Governor Haruhiko Kuroda since 2013.
However, the BOJ may still delay its decision until April if the board requires further data analysis. A recent poll indicates that 35% of economists anticipate an end to negative rates at the upcoming meeting, while 62% project it for the subsequent meeting in April.
The market's focus has shifted to the pace of future interest rate hikes. A rapid increase in bond yields could raise the cost of funding Japan's massive public debt. Additionally, the end of negative rates could trigger a shift in Japanese investments, potentially impacting global financial markets.
The BOJ is expected to provide reassurance that the end of negative rates does not signal aggressive rate hikes similar to those implemented in the United States. This guidance may be included in the policy statement or Governor Kazuo Ueda's post-meeting press conference.