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Bank of Japan raises rates for the first time in 17 years, ends yield curve control.

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Japan’s central bank made a significant move by raising interest rates on Tuesday for the first time since 2007, bringing an end to the last negative rates regime globally. This decision was driven by early indications of strong wage gains this year. The Bank of Japan lifted its short-term interest rates from -0.1% to around 0% to 0.1%, marking the cessation of Japan’s negative rates regime that had been in place since 2016.

In addition to adjusting interest rates, the Bank of Japan announced the elimination of its radical yield curve control policy for 10-year government bonds. This policy involved targeting longer-term interest rates by buying and selling bonds as necessary. While the central bank plans to reduce purchases of corporate bonds and cease buying exchange-traded funds and real estate investment trusts (J-REITS) over time, it will continue purchasing Japanese government bonds at a similar volume as before. Despite persistent ultra-loose monetary policies, the Bank of Japan is now witnessing more sustainable signs of organic price growth.

The recent spike in wages being negotiated during Japan’s “shunto” spring wage discussions has seen a weighted average increase of 3.7% in base pay, according to the country’s largest federation of trade unions. This uptick surpasses last year’s gains, which were the most substantial in three decades. BOJ Governor Kazuo Ueda stresses the importance of these negotiations in driving sustainable price increases and hopes that higher salaries will lead to a positive cycle of domestic demand fueling inflation, ultimately boosting the economy.

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