A method of forming an MTJ with a tunnel barrier having a high tunneling magnetoresistance ratio, and low resistance x area value is disclosed. The method preserves perpendicular magnetic anisotropy in bottom and top magnetic layers that adjoin bottom and top surfaces of the tunnel barrier. A key feature is a passive oxidation step of a first Mg layer that is deposited on the bottom magnetic layer wherein a maximum oxygen pressure is 10-5torr. A bottom portion (21) of the first Mg layer remains unoxidized thereby protecting the bottom magnetic layer from substantial oxidation during subsequent oxidation and anneal processes that are employed to complete the fabrication of the tunnel barrier and MTJ. An uppermost Mg layer may be formed as the top layer in the tunnel barrier stack before a top magnetic layer is deposited.