The Bank of Japan has today ended eight years of negative interest rates and other remnants of its unorthodox policy, making a historic shift away from a focus of reflating growth with decades of massive monetary stimulus.
While the move was Japan's first interest rate hike in 17 years, it still keeps rates stuck around zero as a fragile economic recovery forces the central bank to go slow in any further rise in borrowing costs, analysts say.
The shift makes Japan the last central bank to exit negative rates and ends an era in which policymakers around the world sought to prop up growth through cheap money and unconventional monetary tools.
"The Bank of Japan today took its first, tentative step towards policy normalisation," said Frederic Neumann, chief Asia economist at HSBC in Hong Kong.
"The elimination of negative interest rates in particular signals the BOJ's confidence that Japan has emerged from the grip of deflation," he added.
In a widely expected decision, the Bank of Japan ditched a policy put in place since 2016 that applied a 0.1% charge on some excess reserves financial institutions parked with the central bank.
The Bank of Japan set the overnight call rate as its new policy rate and decided to guide it in a range of 0-0.1% partly by paying 0.1% interest to deposits at the central bank.
The central bank also abandoned yield curve control (YCC), a policy that had been in place since 2016 that capped long-term interest rates around zero.
But in a statement announcing the decision, the Bank of Japan said it will keep buying "broadly the same amount" of government bonds as before and ramp up purchases in case yields rise rapidly.
The Bank of Japan additionally decided to discontinue purchases of risky assets like exchange-traded funds (ETF) and Japanese real estate investment trusts.
"We judged that sustainable, stable achievement of our price target came in sight," the central bank said in a statement explaining the decision to dismantle former Governor Haruhiko Kuroda's massive stimulus programme.
With inflation having exceeded the Bank of Japan's 2% target for well over a year, many market players had projected an end to negative interest rates either in March or April.
In a sign any future rate hike will be moderate, the Bank of Japan said in the statement that it expects "accommodative financial conditions will be maintained for the time being."
The language compared with the more dovish guidance that was removed from the statement, in which the Bank of Japan pledged to ramp up stimulus as needed, and keep increasing the pace of money printing until infla tion stably exceeded 2%.
Japanese shares were volatile today. The yen fell to almost 150 per dollar, as investors took the Bank of Japan's dovish guidance as a sign the interest rate differential between Japan and the US likely will not narrow much.
Under previous Governor Kuroda, the Bank of Japan deployed a huge asset-buying programme in 2013, originally aimed at firing up inflation to a 2% target within roughly two years.
The central bank introduced negative rates and YCC in 2016 as tepid inflation forced it to tweak its stimulus programme to a more sustainable one.
As the yen's sharp falls pushed up the cost of imports and heightened public criticism over the demerits of Japan's ultra-low interest rates, however, the Bank of Japan last year tweaked YCC to relax its grip on long-term rates.
