News ID: 135839
Published: 1019 GMT January 29, 2016

Japan adopts negative interest rate

Japan adopts negative interest rate

In a surprise move, the Bank of Japan has introduced a negative interest rate.

The benchmark rate of -0.1 percent means that commercial banks will be charged by the central bank for some deposits.

It hopes this will be a disincentive to banks to save and prompt them to lend in another attempt to counter the continuing economic slump in the world's third-largest economy, BBC reported.

The eurozone also has negative interest rates, but this is a first for Japan.

It is a move that has been on the cards for Japan's stagnating economy for well over 10 years.

The decision to go negative came after 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 two percent.

Some analysts have cast doubt over how effective the rate cut will be.

In a press conference, the BoJ's governor Haruhiko Kuroda said the weakening growth rate of the global economy was the main factor behind the move: "Japan's economy continues to recover moderately and the underlying price trend is improving steadily 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 percent — far below the central bank's 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, Kuroda told the parliamentary budget committee that he would not introduce more stimulus for the economy.

So the 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.

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."

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 program, which over the past years has failed to boost growth.

Bill Blain, of Mint Partners, said monetary authorities moves to ever-cheaper money since the financial crisis that began in 2008 have distorted global markets — and investors were uneasy: "Investors are worried that the only place we've seen any inflation has been in financial assets, things like stocks, property and bonds. And as a result everyone is suddenly worried they are sitting on nightmares."

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