Japan’s central bank has ended eight years of negative interest rates, in an overhaul of one of the world’s most aggressive monetary easing programmes that sought to encourage bank lending and spur demand.

In its first interest rate hike in 17 years, the Bank of Japan [BOJ] said it was lifting its short-term policy rate from -0.1% to between zero and 0.1%, although analysts said a fragile economic recovery meant it would continue go slow with any further rise in borrowing costs.

The shift makes the BOJ the last central bank to exit negative rates, bringing to an end an era in which policymakers sought to prop up growth by pushing banks to lend more by charging interest on money banks deposited at Japan’s central bank.

In a widely expected decision, the BOJ on Tuesday ditched a policy put in place in 2016, judging that its long-held goal of stable 2% inflation was “within sight”.

Seven of the bank’s nine policy board members supported the move while two opposed it, according to the Kyodo news agency.

Wage growth has added to confidence among BOJ board members about the probability of achieving 2% inflation after decades of deflation and stagnation.

Japan’s biggest employers agreed to a 5.28% wage increase in negotiations with unions this month – the biggest rise since 1991 – lifting hopes for a “virtuous cycle” of pay and price increases.

“This would be the first rate hike in 17 years, so it has a lot of symbolic significance,” Izumi Devalier, head of Japan economics at BofA Securities, said prior to the BOJ’s policy decision.

“But the actual impact on the economy is very small,” she said, noting the BOJ will probably maintain its resolve to keep monetary conditions loose. “We would not expect a substantial rise in funding costs or households mortgage rates.”

The BOJ is hoping that Asia’s second-biggest economy is emerging from a long period of deflationary pressure – a trend that had put it at odds with other central banks, which have raised rates in recent years to tackle inflation triggered by the Covid-19 pandemic, Russia’s invasion of Ukraine and supply chain problems.

The BOJ had come under pressure to end its ultra-easy monetary policy, seen as a key factor in the rapid decline of the yen against the dollar. The weak yen has helped exporters but placed greater financial pressure on households.

Inflation in Japan momentarily reached its highest level in more than 40 years in 2023, forcing households to tighten their belts and creating more headaches for the country’s embattled prime minister, Fumio Kishida. However, that rate was still well below the levels of inflation that caused the cost of living to spike in many countries around the world in recent years.

The US Federal Reserve and other central banks yanked up rates to rein in galloping inflation after Russia’s 2022 invasion of Ukraine.

But haunted by the country’s “lost decades” of stagnation and deflation, the BoJ kept its main rate negative.

Raising the rate will make loans more expensive for consumers and businesses and increase Japan’s bill for servicing its national debt, which at about 260% of gross domestic product is among the world’s highest.

Markets are now focusing on governor Kazuo Ueda’s post-meeting news conference for clues on the pace of further rate hikes.

An end to the world’s last remaining provider of cheap funds could also jolt global financial markets as Japanese investors, who amassed overseas investments in search of yields, shift money back to their home country.

“We trust the BOJ,” the paper quoted a source close to Kishida as saying. The decision “is in their hands”.

With Reuters and Agence France-Presse