Japan’s central bank raises interest rates to highest level since 1995

The Bank of Japan raised its benchmark interest rate to 1 percent on March 19, 2024, marking the first increase since 2007 and the highest level since 1995. This move signifies a significant departure from decades of ultra-low borrowing costs and a shift towards normalizing monetary policy. The decision was driven by persistent inflation, which has exceeded the central bank's 2 percent target for over a year, and the prospect of sustained wage growth. Governor Kazuo Ueda stated that the bank anticipates a "virtuous cycle" of price and wage increases to continue. The policy adjustment also includes ending the purchase of exchange-traded funds (ETFs) and Japanese real estate investment trusts (REITs), which were part of its unconventional easing measures. While the rate hike was widely expected, the Bank of Japan maintained its commitment to purchasing Japanese government bonds (JGBs) at roughly the same pace for the time being, signaling a gradual approach to further tightening. This policy shift aims to address the economic distortions caused by prolonged negative interest rates and quantitative easing, while carefully monitoring the impact on the economy.