For the first time in 17 years, the Bank of Japan hikes interest rates

On Tuesday, the Bank of Japan (BOJ) discontinued its unconventional policies, including negative interest rates, which had been in place for eight years.

This marked a historic departure for the Bank of Japan from its long-standing strategy of using massive monetary stimulus to reflate growth.

Despite being Japan's first interest rate increase in 17 years, the decision keeps rates at zero because, according to analysts, the country's fragile economic recovery will force the central bank to proceed cautiously with any additional increases in borrowing costs.

Japan has become the last central bank to remove negative interest rates, capping a period of global policymakers' attempts to support growth with cheap money and unconventional monetary tools.

Following the decision, Governor Kazuo Ueda announced at a news conference that, like other central banks, they had returned to a regular monetary policy focused on short-term interest rates. In accordance with their assessment of the economy and prices, he continued, they would determine the right level of short-term rates.

The BOJ abandoned a policy that had been in effect since 2016 and levied a 0.1% fee on some excess reserves that financial institutions kept on deposit with the central bank, in a move that was widely anticipated.

The BOJ chose to guide the overnight call rate in a band of 0-0.1% and set it as its new policy rate. It did this in part by giving deposits at the central bank an interest rate of 0.1%.

The head Asia economist at HSBC in Hong Kong, Frederic Neumann, stated that the BOJ took a first, cautious step toward policy normalization today. In particular, the removal of negative interest rates indicates the BOJ's belief that Japan has overcome deflation.