On March 19th, officials at the Bank of Japan (BoJ) made an announcement that signified a significant shift in their monetary policy. After years of battling deflation, the bank declared that they had achieved sustainable inflation of 2%, which allowed them to discontinue a set of measures put in place to revitalize the economy. This decision marked the end of an unconventional experiment that included negative interest rates and bond-buying programs.
The BoJ raised its interest-rate target on overnight loans for the first time since 2007, moving it from between minus 0.1% and zero to between zero and 0.1%. This adjustment meant that the BoJ was no longer the only central bank employing negative interest rates. In addition, the bank announced that it would halt the purchase of exchange-traded funds and abolish its yield-curve-control framework, which had been used to regulate long-term bond yields. Despite these changes, the BoJ assured the public that its policy stance would continue to be accommodative and that the elimination of extreme measures did not indicate the start of a tightening cycle.
These changes were a response to the improving economic conditions in Japan. Inflation had surpassed the 2% target set by the bank for 22 consecutive months. Recent wage negotiations between trade unions and large companies suggested a growth rate of over 5%, a significant milestone in a country with a history of stagnant wage growth. Hoshi Takeo, a scholar at the University of Tokyo, noted that the BoJ’s decision confirmed the shift away from deflation in the Japanese economy. While the economy still faced challenges such as weak consumption and sluggish growth, it no longer required the extensive set of policies aimed at increasing inflation.
When asked about the new framework, BoJ Governor Ueda Kazuo downplayed the significance, stating that it was simply “normal” monetary policy and did not warrant a special name. This characterization reflected the bank’s desire to portray its actions as a return to typical practices after a period of unconventional measures.
Overall, the announcement by the Bank of Japan signaled a shift towards a more traditional monetary policy approach following years of innovative and unprecedented measures to combat deflation. The decision to discontinue negative interest rates and other unconventional policies was a reflection of the improving economic conditions in Japan, with inflation exceeding targets and wage growth showing signs of improvement. While challenges remained, the BoJ’s decision to transition to a more normal policy framework was seen as a positive development for the economy and a sign of progress in the battle against deflation.
