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The Bank of Japan ended an era of negative interest rates and raised borrowing costs for the first time since 2007 in a historic shift.
BoJ Governor Kazuo Ueda ended more than a decade of ultra-loose monetary policy by abandoning easing measures aimed at stimulating Asia's most advanced economies.
Following the 7-2 majority vote, the BoJ said it would guide the overnight interest rate to range between zero and 0.1 percent, the last central bank to end the use of negative rates as a monetary policy tool. Its benchmark rate was previously minus 0.1 percent.
The BoJ switched to negative interest rates in 2016 as it tried to encourage banks to lend more to create spending and limit the risks of a global recession.
As domestic yields become more attractive to Japanese investors and signs of a broader shift in the Japanese economy emerge, Tuesday's policy will likely trigger changes in global investment flows over time.
Workers at some of Japan's biggest firms have received their biggest wage increases since 1991, giving Ueda enough confidence that moderate inflation will continue – a focus of the bank's policies for years.
And companies pass on inflationary costs to consumers and labor shortages contribute to higher wages.
Investors have grown more confident in the economy's prospects. In February the Nikkei 225 stock index finally surpassed levels reached in 34 years.
The yen fell 0.8 percent to ¥150.33 against the dollar after the BoJ's action. The Nikkei 225 index ended 0.7 percent higher, while the broader Topix index rose 1.1 percent.
Despite the return to positive interest rates, BoJ officials do not see the first hike as a signal that more will follow quickly.
Inflation has passed its peak fueled by rising prices of imported energy and food. Core inflation, excluding volatile fresh food prices, fell for the third consecutive month in January.
„Given the current outlook for economic activity and prices, the Bank expects accommodative financial conditions to be maintained for the time being,” the BoJ said.
The central bank on Tuesday lifted its yield curve controls, another policy in 2016 that strengthened its massive monetary easing by capping the yield on 10-year Japanese government bonds.
The BoJ said it would maintain a policy of buying about ¥6tn ($40bn) of Japanese government bonds per month, underscoring continued weakness in the economy as household consumption slows.
But it will stop buying exchange-traded funds and Japanese real estate investment trusts.
As part of the new framework, the BoJ will apply an interest rate of 0.1 percent to deposits held at the central bank, eliminating the complex three-tiered system of borrowing costs adopted to limit the impact of negative rate policy on commercial banks. revenue.
While the end of negative interest rates is widely expected, economists are divided on how far the BoJ will go in removing yield curve controls and other measures such as ETF purchases.
Former BoJ board member Sayuri Shirai, who opposed the introduction of negative interest rates in 2016, said the BoJ had decided there was only one chance to act because the economic conditions for further rate hikes were not yet there.
“We must give credit to Mr. Ueda for his determination and courage. Instead of doing it step by step, he left everything completely, which means this is it,” he said.
Ueda's decision prompted opposition from two BoJ panelists, one of whom argued that he should have held off on removing both negative interest rates and yield curve restrictions until the „virtuous cycle” between wages and prices became more robust.
Additional reporting by William Sandlund in Hong Kong