Japan adopts negative interest rate in surprise move

Tokyo January 29- In a surprise move, the Bank of Japan has introduced a negative interest rate. The benchmark rate of -0.1% means that the central bank will charge commercial banks 0.1% on some of their deposits. It hopes this will encourage banks to lend, and counter the ongoing economic slump in the world’s third-largest economy.

The European Central Bank also has negative rates, however, it is a first for Japan.The decision came in a narrow 5-4 vote at the Bank of Japan’s first meeting of the year on Friday.

“The BOJ will cut interest rates further into negative territory if judged as necessary,” the Bank of Japan said, adding it would continue as long as needed to achieve an inflation target of 2%.

Some analysts have cast doubt over how effective the rate cut will be.In a press conference, the BOJ’s governor Haruhiko Kuroda pointed at the global economic outlook when explaining the cut.

“Japan’s economy continues to recover moderately and the underlying price trend is improving steadily,” he said, but warned that “further falls in oil prices, uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people’s deflationary mindset”.

Earlier in the day, fresh economic data had again highlighted concerns over economic growth. The December core inflation rate was shown to be at 0.1% – far below the central bank target.

Asian shares jumped and the yen fell across the board in reaction to the announcement. Japanese banks though saw their shares drop on the news as lenders are likely to see their margins squeezed even more.

The decision to implement a negative interest rate has been dubbed “Kuroda bazooka” after the governor of the Bank of Japan. Haruhiko Kuroda, is well known for making surprise moves that shock investors. Only a few weeks ago, Mr Kuroda told the parliament budget committee that he would not introduce more stimulus for the economy.

So today’s announcement caused the stock market to jump while the yen fell sharply against major currencies. The option of lowering the cost of borrowing below zero has been on the cards for Japan’s central bank since the early 2000s and it was the first in the world to consider it.

But when it comes to implementing the policy, Denmark, Sweden and Switzerland were first, followed by the European Central Bank which had to do everything it could to keep the EU economy afloat after the eurozone economic crisis.

Last resort

There are doubts, however, over how well the new policy will work. “Negative interest rates are one of the last instruments in the BOJ’s tool box,” Martin Schulz of the Fujitsu Institute in Tokyo told the BBC. “But their impact is unlikely to be strong.”

Mr Schulz cautioned that in the eurozone, negative interest rates are being used to tackle a financial crisis, whereas Japan is in a protracted slow growth environment.

“In Japan, credit didn’t expand not because banks were unwilling to lend but because businesses didn’t see the investment perspective to borrow. Even with negative interest rates, this situation will not change.” “Businesses don’t need money – they need investment opportunities. And that can only be achieved by structural reforms, not by monetary policy,” he said.

The decision comes in addition to the BOJ’s massive asset-buying programme, which over the past years had failed to boost growth.

Why has Japan made this move?

Japan is currently facing very low inflation, which means that people and companies tend to hold on to their money on the assumption that they can get more for it later in time. So rather than spend or invest it, they will keep it in the bank. Charging a percentage to keep money in the central bank might encourage commercial banks to lend it out. That would boost both domestic spending and business investment. It is also aimed at driving inflation up, which is another incentive for people and businesses to spend rather than save.