The Japanese central bank raised interest rates on Tuesday for the first time since 2007, taking them above zero. It closes a chapter in its aggressive efforts to boost an economy that has long struggled with growth.

In 2016, the Bank of Japan took the unorthodox step of cutting borrowing costs below zero to boost borrowing and lending and boost the country’s stagnant economy. Negative interest rates – which the central banks of some European economies have also introduced – mean that depositors pay to keep their money in a bank and borrowers can borrow on very favorable terms, giving them an incentive to spend.

But Japan’s economy has recently begun to show signs of stronger growth: inflation, which has been low for years, has accelerated, supported by above-average wage increases. Both are signs that the economy may be on a more sustainable growth path, allowing the central bank to tighten its interest rate policy, years after other major central banks quickly raised rates in response to a jump in inflation.

Even after Tuesday’s decision, interest rates in Japan are far lower than in the world’s other major developed economies. The Bank of Japan’s key interest rate was raised to an area of Zero to 0.1 percent of minus 0.1 percent.

In a statement on Tuesday, the bank said it had concluded that the economy was in a “virtuous cycle” between wages and prices, meaning that wages rose enough to cover rising prices, but not so much strong that corporate profits would be reduced. The main inflation reading in Japan was 2.2 percent in January, according to the latest available data.

The central bank also scrapped policies under which it bought Japanese government bonds as well as funds that invest in real estate or track stocks to curb the level of market interest rates and encourage businesses and households to borrow. The bank had slowly eased its policies over the past year, leading to higher interest rates on debt as the country’s growth prospects improved.

The bank said that the negative interest rates and the other measures it has taken to stimulate the economy have “done their jobs”.

In many countries, a rise in inflation has plagued consumers and policymakers, but in Japan, which has more often struggled with growth-sapping deflation, the recent rise in prices was welcomed by most economists. The Japanese stock market, supported by a positive economy and shareholder-friendly corporate reforms, has attracted huge sums of money from investors around the world and recently helped the Nikkei 225 index break a record high set since 1989. The Nikkei rose 0.7 percent on Tuesday.

The move away from negative interest rates, which could generally help strengthen the country’s weak currency, is seen by investors as another important step in Japan’s turnaround.

“This is another milestone in the normalization of monetary policy in Japan,” said Arnout van Rijn, portfolio manager at Robeco, who built and led the Dutch fund manager’s Asia office for more than a decade. “As a long-time supporter of Japan, this is very significant.”

Bets on a rise in interest rates intensified this month after the Japan Federation of Trade Unions, the country’s largest union federation, said its seven million members would receive wage increases averaging over 5 percent this year, the largest annual negotiated increase since 1991 This led to an average wage increase of around 3.6 percent in 2023.

Before the results of the wage negotiations were announced, investors had expected the Bank of Japan to wait longer before raising interest rates.

“This decision was based on confidence that the Japanese economy itself is changing, rather than short-term concerns,” said Shigeto Nagai, head of Japan economics at Oxford Economics.

Accelerating wage growth is a key sign to policymakers that the economy is strong enough to generate some inflation and can withstand higher interest rates. Like other major central banks, the Bank of Japan aims for an annual inflation rate of 2 percent; The rate has been at or above this rate for almost a year 2 years.

The rise in wages is a signal that companies and workers continue to expect higher prices, said Mr van Rijn. “People no longer believe prices will fall, so that impacts wage demands.”

The Bank of Japan concluded in its statement that “it is very likely that wages will continue to rise steadily this year after rising significantly last year.”

Shizuka Nakamura, 32, a resident of Yokohama, a port city south of Tokyo, said she had noticed rising prices. “I feel the cost of living rising,” said Ms. Nakamura, who works in an administrative job at a construction company. She recently had a child.

“My friends who are around the same age as me and also have kids are all saying that things like diapers and baby food are getting more expensive,” she said.

The Bank of Japan’s interest rate move was also significant because it was the last major central bank to exit its negative interest rate policy. They and central banks in Denmark, Sweden, Switzerland and the euro zone broke monetary policy taboos by pushing interest rates below zero to stimulate economic growth after the 2008 financial crisis. (Sweden ended Negative interest rates in 2019, the other European central banks followed in 2022.)

Negative central bank interest rates caused turmoil in global bond markets, with more than $18 trillion worth of debt trading at a negative yield at its peak in 2020. As inflation and economic growth have returned and central banks have raised their key interest rates – most far more aggressively than Japan’s – hardly any debt has a negative yield anymore.

By the end of Tuesday, some of Japan’s largest commercial banks, including Sumitomo Mitsui and Mitsubishi UFJ, had announced slight increases in the interest rates they pay to depositors.

Rising interest rates in Japan are making investing in the country relatively more worthwhile for investors, but the Federal Reserve’s target interest rate is still about five percentage points higher and the European Central Bank’s is four points higher. While foreign investors have started funneling cash into the country, overseas returns are still attractive for Japanese investors, preventing a rapid repatriation of cash even as the Fed and ECB are expected to begin cutting interest rates.

The Bank of Japan also proposed making a gradual change in its policy. Raising interest rates too quickly could kill growth before it takes hold.

Central bank Governor Kazuo Ueda said he would closely monitor the economy before making further policy changes. At a news conference, Mr. Ueda, 72, a veteran central banker and academic who has been in his position for a year, said the bank would maintain a broadly “accommodative” policy, meaning it would not put too much pressure on the economy. “Even if we were to raise rates in the future, we would do so slowly,” he said.

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