Bank of Japan raises interest rates for the first time since 2007

The bank said financial conditions will remain accommodative, indicating this isn’t the beginning of an aggressive tightening cycle of the sort seen in US and Europe in recent years, a factor that might explain the slide in the yen after the announcement. The vote for the rate hike was 7-2.

The BOJ also scrapped the yield curve control program while pledging to keep buying long-term government bonds as needed. It also ended its purchases of exchange-traded funds.

The yen fell against the dollar from 149.29 just before the announcement to as weak as 149.92 afterwards.

In ending the negative rate, Governor Kazuo Ueda makes history by turning the page on the BOJ’s experimental monetary easing program after years in which Japan’s central bank was a global outlier. The policy gap now becomes even more stark as the BOJ makes its first upward move in close to 17 years just as its peers around the world are mulling cutting their rates after historically aggressive tightening campaigns.

The BOJ said its stable inflation target of 2% has come into sight as a virtuous cycle of wages feeding demand-led inflation is emerging. Rengo, Japan’s biggest umbrella group for labor unions, reported Friday that wage talks resulted in an initial deal for 5.28% increases, the best outcome since 1991. That fueled market speculation that the conditions were finally in place for a rate move after Ueda had repeatedly emphasized the importance of wage trends.

Some 38% of 50 economists surveyed by Bloomberg had expected the March rate liftoff, while another 54% predicted the move would come a month later. The survey was conducted before the strong results from annual wage negotiations that fueled widespread speculation the central bank wouldn’t wait.

As part of its policy shift, the central bank said it would ditch its buying of real estate investment trusts, too. The BOJ adopted the highly unusual measure of buying risk assets like ETFs in 2010, ultimately becoming the biggest single holder of Japanese stocks, before buying operations slowed to only three instances last year. The optics of using the measure became increasingly awkward as Japanese stocks hit a record high this month, begging the question of why the equity market needed support.

Ueda, the first former academic to take the helm at the BOJ, had previously adjusted aspects of the ultra-easy policy settings he inherited when he became governor in April, tweaking the parameters of YCC in both July and October. Few analysts predicted Ueda would be able to unwind within a year so many policies that had become a headache for the central bank.

Ueda’s predecessor Haruhiko Kuroda launched a shock-and-awe stimulus bazooka in April 2013 with the aim of achieving 2% inflation in two years. As that goal stayed out of reach, Kuroda adopted the negative rate and then the YCC program in 2016. His focus thereafter increasingly fell on enhancing the sustainability of these monetary settings with policy tweaks.

The prolonged monetary easing led to an expansion of the BOJ’s balance sheet to the point where it’s now worth 127% of the annual economy, four times bigger than the Federal Reserve’s assets-to-economy ratio. Even so, inflation didn’t really kick in until the supply shocks triggered by Covid-19 and Russia’s war in Ukraine. Japan’s key inflation gauge has stayed at or above the 2% target for 22 months, and that stretch is forecast to continue with national price data due Friday.

Ueda’s post-decision press conference usually begins at 3:30 p.m. in Tokyo. At that event he will elaborate on the thinking behind Tuesday’s policy decisions.