The BOJ’s minus 0.1 per cent benchmark interest rate, reduced from 0.1 per cent, means that banks parking excess funds with the central bank are charged for doing so on a portion of those funds.
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It hopes this will encourage banks to lend and counter the ongoing economic slump in the world’s third-largest economy. “The BoJ will cut the interest rate further into negative territory if judged as necessary”, it said in a statement. GDP rose at an an anaemic annual rate of 0.7% as consumers and businesses cut back on spending, while United States exports were hurt by weaker overseas markets. As such, it is Japanese, rather than foreign, investor behavior that will determine the extent to which ownership is rebalanced towards higher-yielding foreign fixed income.
In normal times, banks pay depositors interest on their cash deposits.
That safety flow could be partially revived should manufacturing data out of China later in the day renew worries about slowing global growth.
In response, Asian shares jumped and the yen fell against other currencies. The moment Bank of Japan went negative on its benchmark rate the yen took a hit.
Haruhiko Kuroda, Governor of the Bank of Japan and Mario Draghi, President of the European Central Bank, now joined at the hip in the land of negative interest rates. More stimulus is needed locally, so why not settle for a break?
A wait-and-see mood is expected to spread in the currency market this week, with U.S.jobs data for January to be released on Friday.
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.
There are doubts, however, over how well the new policy will work. Analysts said that the yen partly recovered against the dollar since the reaction from the BoJ’s move had ended, while the euro and yen also gained on expectations for a more dovish path of Fed rate hikes. “But their impact is unlikely to be strong”. He added that success of the ECB’s negative-rate policy in Europe doesn’t guarantee the same for Japan. “Any time central banks push interest rates lower, stocks applaud it”, John Caruso, senior market strategist at RJO Futures, told CNBC.
The introduction of a negative interest rate policy will not change this basic factor behind sluggish lending growth.
“Businesses don’t need money – they need investment opportunities”.
Because of these problems, it was once believed that using this unconventional monetary policy tool was a tall order for any central bank.
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The decision comes in addition to the BOJ’s massive asset-buying programme, which over the past years had failed to boost growth.
