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Japan Ends Negative Rates Era: Farewell to Free Money?

Carolane de Palmas | Tuesday 19 March 2024

The era of ultra-low borrowing costs is ending in Japan, as the Bank of Japan (BoJ) ditched its negative interest rate policy today in a historic shift. While eyes turn to other major central banks now, let's have a closer look at Japan's new monetary policy:

An illustration of the Japanese flag and economic charts

The Bank of Japan Makes History Since the Financial Crisis: Interest Rates Up for the First Time Since 2007

While most investors are wondering when central banks in developed economies will start cutting their key interest rates, the situation in Japan is quite different. To counter a sharp fall in inflation and a weakened economy, the country adopted a policy of negative interest rates in 2007 to encourage companies to lend more and thus support consumption in Japan (which usually leads to higher Gross Domestic Product or GDP.

With the rise in inflation observed in the world since the armed conflict in Ukraine, the monetary policy adopted by Japan at the time of the global financial crisis no longer seemed relevant, which pushed investors to believe an interest rate hike would soon be voted on. 

Higher food costs and more expensive imports have been pushing inflation to its highest level in 41 years in the country, with a core Consumer Price Index (CPI) averaging 3.1% in 2023.

On Tuesday, March 19th, the Bank of Japan became the last central bank to exit its negative rate policy by deciding to target an overnight interest rate in a range of 0% to 0.1%, as the central bank believes that inflation is likely to move in “a sustainable and stable manner” towards its 2% target over time. (Source: Financial Times)

Beyond Negative Rates: BoJ Abolishes Yield Curve Control

In addition to using negative interest rates to stimulate the Japanese economy, the Bank of Japan went further in 2016 with the implementation of an aggressive monetary easing program — the Yield Curve Control (YCC) of 10-year Japanese Government Bonds (JGB). 

By buying government bonds within its YCC program, the Japanese central bank was aiming to drive their prices up and lower interest rates towards its desired level (bond prices and yields have an inverse relationship). With lower longer-term interest rates, businesses and consumers were incentivized to borrow money for investments and spending, potentially supporting economic growth and leading to higher prices.

Today, the BoJ decided to end this ultra-loose monetary measure, as it has “fulfilled” its purpose. Even though the central bank declared that it will continue to buy JGB at roughly the same amount (around about 6 trillion yen per month) while stopping ETFs and J-REITS purchases, it isn’t committed to capping JGB yields to a specific range anymore.

Central Bank Week: Investors’ Focus Shifts After Japan's Rate Hike

Another central bank met today, Tuesday,— the Reserve Bank of Australia (RBA), which decided to leave interest rates unchanged at 4.35% for a third consecutive time. The rest of the week is also busy with various central bank meetings that may provide clues about upcoming interest rate cuts. 

Tomorrow, Wednesday, March 20th, the Federal Open Market Committee (FOMC) will decide on interest rates, but 99% of market participants believe that the Federal Reserve (Fed) will leave rates unchanged in March. On Thursday, March 21st, the Swiss National Bank (SNB) and the Bank of England (BoE) will also meet to discuss monetary policy, but no major changes are expected by the market before June 2024.


As the Bank of Japan emerges from nearly two decades of negative interest rates, investors are now speculating about the timing of potential rate cuts in other major economies. This week's upcoming central bank meetings may offer fresh insights into this matter, influencing the direction of the financial markets, especially Forex and stocks.

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