Japan finally raises interest rates as inflation wishes come true

Japan's central bank has raised borrowing costs for the first time in 17 years.

The Bank of Japan (BOJ) raised its main interest rate from -0.1% to a range of 0% to 0.1%. This is in response to the rise in wages due to the rise in consumer prices.

The bank lowered interest rates below zero in 2016 in a bid to stimulate the country's sluggish economy.

This rate hike means that no country will have negative interest rates.

The Bank of Japan also abandoned a policy known as yield curve control (YCC), in which it purchased Japanese government bonds to control interest rates.

The YCC policy, which has been in place since 2016, has been criticized for distorting markets by preventing long-term interest rates from rising.

Ever since Governor Kazuo Ueda took office in April last year, expectations have been high that the Bank of Japan would finally raise interest rates.

The latest official figures showed Japan's core consumer inflation remained at the Bank of Japan's 2% target in January, even as price growth slowed.

Nobuko Kobayashi from consulting firm EY Parthenon told the BBC that the final rate hike decision would depend on whether the country's largest companies raise wages for their employees to cope with rising costs of living.

Earlier this month, Japan's biggest companies agreed to raise salaries by 5.28%, the biggest increase in more than 30 years.

Wages in the country have been flat since the late 1990s, as consumer prices have risen very slowly or even fallen.

But a return to inflation could be both good and bad news for the economy, Kobayashi says.

“It would be good if Japan could stimulate productivity and domestic demand, but it would be bad if inflation continued due to external influences such as wars and supply chain disruptions.”

In February, Japan's main stock index, the Nikkei 225, closed at an all-time high, surpassing its all-time high set 34 years ago.

Gross domestic product (GDP) rose 0.4% year-on-year in the last three months of 2023, according to revised data.

During the pandemic, central banks around the world lowered interest rates to try to counter the negative effects of border closures and lockdowns.

At the time, some countries such as Switzerland and Denmark, as well as the European Central Bank, had introduced negative interest rates.

Since then, central banks around the world, including the US Federal Reserve and the Bank of England, have aggressively raised interest rates to stem soaring prices.