BOJ Introduces Negative Interest Rate to Boost Economy

The bank “will cut the interest rate further into negative territory if judged as necessary”, it said. The reaction was immediate with the dollar surging over two yen to 121.14.

The Bank of Japan announced it will charge 0.1 percent interest on current accounts that financial institutions hold at the central bank. Rates now are near zero.

International Monetary Fund recently projected a sloth recovery-the global economy is projected to grow 3.4 per cent in 2016 and 3.6 per cent in 2017 as compared with 3.1 previous year.

“There has been big volatility in financial markets…”

“To preempt the manifestation of this risk and to maintain momentum towards achieveing the price stability target of 2%, the bank chose to introduce QQE with a negative interest rate”.

“The Bank of Japan chose to adopt negative interest rates…to forestall such risks from materialising”, he told a news conference after the decision.

But by introducing the negative interest rates the bank is hedging that commercial banks will be further incentivized to lend to businesses to promote widespread investment and growth.

But analysts said the announcement could be construed by some as a desperate move after three years of Prime Minister Shinzo Abe’s big-spending, easing money policy, dubbed “Abenomics”.

Some market participants, however, speculate the BOJ may ease as plunging oil prices force it to push back the timing for hitting its price target.

A similar below-zero policy was adopted by the European Central Bank in 2014, the first time by a major central bank.

Five of the nine members of the BOJ Policy Board were in favor of the rate of minus 0.1 percent. The scheme is a cornerstone of Abenomics.

However, markets pared back these gains in short order, which may in some respects “reflect growing market concern that central banks are delving into a tit-for-tat currency devaluation war”, wrote Angus Nicholson, market analyst at IG.

“Governor Kuroda has gained notoriety by changing course when it is least expected, and today’s move will only serve to cement this reputation”, Marcel Thieliant from research house Capital Economics said in a commentary. Household spending was down by 4.4 per cent on a year ago.

Bank shares were hammered, with Mitsubishi UFJ Financial Group falling 4.3 percent, Sumitomo Mitsui Financial Group dropping 3.0 percent, and Japan Post Bank diving 5.9 percent. It is set to firm slightly by 0.1 percent for the week if it closes at the midday level.

OUT OF STOCK: Equipment rental company United Rentals reported a smaller fourth-quarter profit and less revenue than Wall Street expected. Kuroda has warned that with inflation expectations “somewhat weak”, he was carefully watching markets.

The Nikkei rose to 17,559.76 points by midafternoon after diping into negative territory at one point as investors digested side effects from the new policy on the banking sector. If the financial institutions were to pay 0.1% on this incremental increase, that’s 0.033 trillion yen on an annual term, less than 0.3% of the recurring profit of 13 trillion yen Japanese financial institutions made in FY2014.

A deflationary price spiral in Japan for years put consumers off buying in the hope of getting goods cheaper down the road, denting firms’ expansion and hiring plans. That has weighed on growth in the wider economy.