The Bank of Japan this week ended an era with a decision to raise interest rates.
For the first time in over a decade or so the overnight interest rate — the borrowing cost for banks in Japan — has moved into positive territory. The move was heralded as a return to normalcy for Japan, but it is more symbolic than substantive. The Japanese economy still faces stout headwinds that will frustrate the BOJ’s hopes of creating sustainable inflation.
Decision makers at the BOJ have been among the world’s most creative central bankers with their efforts to end the deflation that has settled into Japan’s economy. They introduced the world to such innovations as zero interest rates (the name says it all) and quantitative easing and yield curve control, the later two of which aim to stimulate economic activity by purchasing government bonds and other assets, providing liquidity to the economy.