Bank Of Japan Raises Interest Rates, Abandoning 17-Year Negative Interest Rate Stint — Nikkei Reacts By Dropping Over 200 Points

In a historic move, the Bank of Japan (BOJ) has increased interest rates for the first time in 17 years, signaling the end of the world’s last negative rates regime.

What Happened: The BOJ announced on Tuesday that it would raise its short-term interest rates to approximately 0% to 0.1% from -0.1%, marking the first rate hike since 2007, reported CNBC. The negative rates regime has been in place since 2016.

Japan’s benchmark stock index, the Nikkei 225, initially dropped more than 239 points to 39,529 after the announcement, but quickly rebounded, gaining 129 points.

The central bank also revealed that it would abolish its radical yield curve control policy for 10-year Japanese government bonds, which involved targeting longer-term interest rates by buying and selling bonds as necessary.

Despite this, the BOJ will continue its purchases of Japanese government bonds with broadly the same amount as before, representing a significant pullback in its decades-old radical policy tinkering.

BOJ Governor Kazuo Ueda had previously emphasized that the outcome of this year’s annual “shunto” wage negotiations would be crucial to sustainable price increases. The Bank of Japan expects higher salaries to lead to a virtuous spiral with domestic demand fueling inflation.

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Why It Matters: The decision by the Bank of Japan comes at a time when the country’s economy is witnessing a significant shift. Japan’s stock market has been experiencing a surge, with investors redirecting their funds from China to Japan due to the economic and geopolitical challenges faced by China.

In February, the Nikkei 225, Japan’s benchmark stock index, hit a record high, surpassing levels last seen in 1989. This milestone comes amid a global economic shift and a resurgence in Japan’s stock market, driven by various factors.

Furthermore, the surge in Taiwanese chip companies’ presence in Japan is seen as a response to the global chip industry’s evolving landscape, with the U.S. aiming to curb China’s advancements in cutting-edge semiconductors.

The prospect of former President Donald Trump returning to the White House is reportedly causing unease among Japanese businesses. A Reuters poll, conducted in February, revealed that nearly half of Japanese companies perceive a potential Trump presidency as a business risk.

These developments indicate a significant repositioning of Japan in the global economic landscape, with the country’s central bank’s decision to raise interest rates marking a crucial step in this transformation.

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