Japan introduces negative interest rate to boost economy

World shares jumped and the yen slumped on Friday after the Bank of Japan took one of its main interest rates into negative territory, its boldest step yet to re-inflate the economy.

But, with consumer inflation just 0.1 percent in the year to December despite three years of aggressive money-printing, the BOJ’s policy board decided in a narrow 5-4 vote to charge a 0.1 percent interest on a portion of current account deposits that financial institutions hold with it.

The Bank of Japan has cut interest rates to -0.1% as policymakers try to keep their economic plans intact in the face of global headwinds.

Fidelity Japan Active Growth fund manager Kok Wei Yee said the move would bring a welcome boost to investor sentiment and business confidence.

“Irrespective of this surprise easing from the BOJ, the yen remains rather undervalued, especially after this knee-jerk fall past 120 (against the USA dollar)”. “The Bank of Japan has yet again put back when it expects to reach its 2% inflation target, this time to late 2017″.

Official European inflation data shows prices across the region rose 0.4% in January, which was in line with expectations.

While the BOJ will continue with its existing asset purchases, its adoption of negative interest signals a big change in the focus of the central bank’s methods of easing away from a quantitative balance-sheet expansion. “Pressure on the BoJ will mount to do even more in coming months to attain their inflation target”.

Japan has now joined a negative interest rate club that includes Germany (and the rest of the eurozone), and Switzerland – dubbed the “Three Musketeers” by Societe Generale strategist Kit Juckes.

The disappointing numbers highlight Tokyo’s challenge in tackling years of deflation and weak growth with prime minister Shinzo Abe’s “Abenomics” reform programme. The yen also fell 1.6 percent against the euro.

The central bank said in a statement it would cut interest rates further if it judged it necessary. The yield on 10-year government bonds halved to 0.11 percent. Fourth-quarter data is due next month.

Average incomes fell 2.9 percent from a year earlier in December.

The yen had surged more than two percent against the dollar this year as the volatility that has shaken global markets sent investors running for the Japanese unit, which is considered a safe bet in times of turmoil and uncertainty.

“Corporate Japan has accumulated substantial cash on balance sheets, while the Japan labor market is getting tighter”, Ajay Kapur of Merrill Lynch said in a recent report.