After 17 years, Bank of Japan increases interest rate; Negative rate regime ends

Japan's central bank raised its benchmark interest rate Tuesday for the first time in 17 years, ending a longstanding policy of negative rates meant to boost the economy.

The short-term rate was raised to a range of 0 to 0.1% from minus 0.1% at a policy meeting that confirmed expectations of a shift away from ultra-lax monetary policy.

It's the first rate hike since February 2007.

The bank had set an inflation target of 2% as an indicator that Japan had finally escaped deflationary tendencies. But it had remained cautious about “normalizing” monetary policy, or ending negative borrowing rates, even after data showed inflation at about that rate in recent months.

Another factor supporting the shift: Japanese companies have announced relatively robust wage hikes for this year's round of negotiations with trade unions.

Bank of Japan Chief Kazuo Ueda had repeatedly said the bank's would review its negative rate and other easing measures if the 2% inflation target was met and was accompanied by wage increases.

The Japanese central bank's policy is quite different from those of the U.S. Federal Reserve and the European Central Bank. Both have been moving to lower interest rates after rapidly raising them to clamp down on inflation.

The Bank of Japan has kept borrowing costs extremely low for many years to encourage Japanese consumers and businesses to spend and invest to help sustain stronger economic growth.

Japan recently became the world's fourth biggest economy, slipping behind Germany, in terms of its nominal gross domestic product, or GDP. The U.S. economy is the largest, followed by China, which overtook Japan over a decade ago.

BOJ officials say they want to make sure inflation is based on domestic factors that can sustain higher wages, not external ones. Analysts expect the Bank of Japan to continue to move slowly on further raising interest rates.

The ultra-lax monetary policy also included huge injections of money into the economy through purchases of Japanese government bonds and other assets. The bank said the BOJ would continue with those, and adjust quickly depending on economic trends.

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