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Japan Reverses Course, Increases Interest Rates for First Time in 17 Years

Leo Timm
Leo Timm covers China-related news, culture, and history. Follow him on Twitter at @kunlunpeaks
Published: March 27, 2024
The Japanese flag flutters over the Bank of Japan (BoJ) head office building (bottom) in Tokyo on April 27, 2022. (Image: KAZUHIRO NOGI/AFP via Getty Images)

Unlike most major economies, Japan has spent much of the 21st century adhering to a doctrine of extremely low interest rates — so low that since 2016, they were actually negative. 

That changed on Tuesday, March 19, when the Bank of Japan (BoJ) announced the country’s first interest rate hike in 17 years. 

Even during the COVID-19 pandemic and following the outbreak of the war in Ukraine, the Japanese financial establishment stuck to the policy, which saw interest rates hover between 0.0 and -0.1 percent. 

Breaking the news at a press conference, the BoJ’s governor Kazuo Ueda said that going forward, “policy rates are going to be determined based on the economic and price situations.”

Prefacing that statement, Ueda proclaimed, “We are going to set monetary policy like other normal central banks.”

The change in policy makes Japan’s central bank the last bank to exit negative rates, a policy that sought to encourage economic growth by making cheap money readily available.

Japan is easing into the new monetary policy however. The BoJ set overnight lending rates to between 0.0 and 0.1 percent, according to Nikkei Asia and other Japanese news media. 

The BoJ also indicated that future rate hikes will be moderate, saying that it expects “accommodative financial conditions to be maintained for the time being.”


Inflation drove the decision

Market players were anticipating an end to negative interest rates either in March or April this year because inflation in the country has been exceeding the BoJ’s two percent target for well over a year.

In addition, expectations that the shift in policy was coming heightened after wage talks with unions resulted in some of the largest wage hikes seen in the country in 33 years. 

Commercial banks have already taken notice and are moving to raise some of their deposit rates, the first such action since 2007. 

Bart Wakabayashi, Branch Manager of State Street Tokyo, said that “essentially” Japan is a now a “normal country,” while admitting that how the policy change will impact local households and their spending power remains to be seen.

“How does this impact households locally and their spending power? I think that’s going to be the next big discussion and with an eye to that I don’t think the BoJ can do anything beyond what they’ve announced,” he said, as reported by Reuters. 

Japanese households may feel the squeeze due to the change in monetary policy. Shortly after the BoJ announced the change, the yen fell and was trading at 151.97 per dollar, its weakest performance since 1990. While Japanese exporters’ profits will increase, import costs are expected to rise, placing more of a financial burden on Japanese households.  

Both Nomura and BNP Paribas expect the BoJ to implement another rate hike before years’ end, making servicing the country’s debt — which is twice the size of its economy — more difficult.


Winners and losers

Business owners, particularly those reliant on imports, are expected to be among the winners of the new policy, including businesses reliant on tourism as Japan’s weak currency has made the country a bucket-list destination for many.

Personal, unsecured debt is expected to remain relatively cheap over the foreseeable future as well. Credit card delinquency rates in Japan — which hovered around 2.73 percent in fiscal year 2022 — are not a concern. In comparison, delinquency rates in the United States over the same period were around 10 percent.  

However, total household debts in Japan account for 122 percent of net disposable incomes on average, higher than in most advanced economies. 

Due to well over a decade of extremely low or negative interest rates, nearly three-quarters of home mortgage holders in the country have opted for a floating-rate mortgage, meaning their mortgage payment fluctuates with interest rates.

As rates are expected to rise over time, fixed-rate mortgages are expected to make a resurgence as mortgages renew, but many will see their regular payments go up before that.