Japan’s central bank increased the interest rate on Tuesday for the first time in 17 years. This ends the old policy of having low interest rates to help the economy.
The Bank of Japan increased the interest rate for banks to borrow money overnight from 0 to 0. 1%. This was expected as a move away from very loose monetary policy.
It was the first time the interest rate went up since February 2007. The low interest rates and other ways of putting money into the economy have helped, according to the head of the Bank of Japan. Kazuo Ueda spoke to the journalists.
The bank wants to keep inflation at 2%. This is important to see if Japan is no longer in a period of falling prices. However, it had been careful about making monetary policy “normal” or ending negative borrowing rates, even though inflation has been about that rate in recent months.
Ueda said that wages and prices are gradually increasing, and that the government will keep monetary policy relaxed for a while.
Private banks and other financial companies will decide on their interest rates, but he does not expect any big increases. The central bank will keep an eye on any major changes in interest rates that could cause confusion, he said.
“We decided because we predicted that inflation would stay at 2% and not change,” he said.
Another reason for the change: Japanese companies have said they will increase wages this year during negotiations with trade unions.
The Bank of Japan said that companies were making more money from their work and sales. They looked at stories from workers and also the information they collected.
Japan’s economy has somewhat improved, said the report.
The market didn’t react much because people already expected the decision. This was because Japanese news had already talked about it earlier this week. Tokyo’s main stock index went up by almost 0. 7% on Tuesday, and the value of the dollar stayed at around 150 yen.
Experts believe that the bank will not quickly make changes to its easy lending system and will keep a close watch on prices.
Harumi Taguchi, a top economist at S&P Global Market Intelligence, thinks that inflation might drop below 2% and higher wages might not make people spend more if they decide to save their money instead.
“According to S&P Global Market Intelligence, the bank’s decisions will help financial markets work better, but they probably won’t have much effect on the overall economy. ”
Ueda said that the central bank would reconsider its low interest rate and other ways of making it easier to borrow money if prices went up by 2 percent and salaries also went up.
The Japanese central bank’s rules are not the same as the US Federal Reserve and the European Central Bank. Both have been lowering interest rates after previously raising them quickly to control inflation.
For a long time, the Bank of Japan has kept the cost of borrowing money very low. They want to encourage people and businesses in Japan to spend and invest more to make the economy grow stronger.
Japan is now the fourth largest economy in the world. It has fallen behind Germany in terms of how much money it makes. The economy of the United States is the biggest, and China is next after that. China became bigger than Japan more than ten years ago.
BOJ officials want to make sure higher wages are caused by things in Japan, not in other countries. Experts think that the Bank of Japan will continue to be cautious in raising interest rates.
The very relaxed monetary policy involved putting a lot of money into the economy by buying Japanese government bonds and other things. The bank said that the BOJ will keep buying government bonds at a rate of about 6 trillion yen, which is about $40.