Bank of Japan exits zero rate policy, sets interest rate at 0.1%

The Bank of Japan (BoJ) on Thursday announced a departure from its zero rate policy, keeping the short-term target rate in the 0-0.1 per cent range and fixing interest rate at 0.1 per cent on reserves that financial institutions park with it.

The announcement of a positive rate of interest, which comes after eight years of negative interest rates, is also Japan’s first rate hike in 17 years. 

The decision to set the overnight call rate of 0-0.1 per cent as its new short-term rate, however, shows the central bank is not yet ready to shed its focus on economic growth.

Addressing a press conference after the policy announcement, Governor Kazuo Ueda said if the trend inflation hardens, BoJ might think of a further increase in short-term rates.

BoJ has for years a negative interest policy in its efforts to safeguard private investment and consumption growth through monetary stimulus.

Despite the rate hike, BoJ will go slow with its implementation and in view of the fragility of the economy.

BoJ is perhaps the last central bank to do away with negative rate policy as major economies around the world started realising that the policy can bring more harm than good as the pump-priming effects of negative rates fade.