It wants to get inflation and growth moving by penalizing people for saving money, but the move also has the effect of further depressing the yen.
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By penalising banks for hoarding cash, the BOJ hopes to push the lenders to give out more loans, thereby pumping more liquidity into the economy to boost growth.
Make no mistake, “The Bank will continue with “QQE with a Negative Interest Rate”, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner”. The imposition of the negative rate, passed with a narrow 5-4 majority by the BOJ’s nine-member board, complements the central bank’s record asset-purchase programme including ¥80 trillion a year in government-bond purchases, which was kept unchanged yesterday.
El-Erian said if the dollar strengthens another 5-10 percent, “the Fed will start worrying”.
Despite the BOJ action, interest rate gaps between Japan and the United States “did not expand as expected”, due to a coincidental fall in U.S. Treasury yields, keeping the dollar’s ascent against the yen in check, said an official at an asset management firm.
El-Erian said “countries are fighting for a small amount of global growth as opposed to pursuing policies that create the incremental growth that the system is capable of”.
“The Bank of Japan chose to adopt negative interest rates…to forestall such risks from materialising”, he told a news conference after the decision.
European shares tracked Asian stock markets higher, with the pan-European FTSEurofirst 300 index up 0.9 percent, having fallen 1.7 percent on Thursday.
The Bank of Japan on Friday adopted a negative interest rate policy to spur lending and help drive inflation towards its two-percent target.
Move over QE and QQE (you too, Operation Twist), we have a new policy measure lexicon in town – and its name is “Quantitative and Qualitative Easing with a Negative Interest Rate”. But while corporate profits have soared as massive stimulus weakened the Japanese currency, making earnings made overseas worth more when converted into yen, investment and wages have lagged.
The index dipped into “bear market” territory – meaning it was a fifth off its peak less than a year ago – amid investor worries over the slowing Chinese economy and the slump in the price of oil.
“The signal to delay any rate hike would not bring much investors to the bond market, making the equity market more preferable to more investors”, he said.
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Core inflation – stripping out highly volatile oil prices – has barely budged since last July, and there are some signs already that European activity is being hurt by global economic uncertainty and market turmoil. The US dollar is down 8 points 99.51 trading near recent highs.
