The Bank of Japan tries to overcome deflation and stimulate the economy by forcing banks to pay interest on money they have on deposit with the central bank.
In a bold move the Bank of Japan has unexpectedly cut a benchmark interest rate below zero to try to stimulate the economy.
That means commercial banks will have to pay to keep their money on deposit with the central bank.
The hope is that will encourage them to lend money, putting more cash out there and boosting inflation to the BoJ’s target of 2 percent.
The Bank’s governor Haruhiko Kuroda said if needs be they will do more: “In terms of interest rates, the Bank of Japan has decided to implement a negative rate of minus 0.1%. Going forward, if it becomes necessary, we would look at making that even lower, if necessary.”
This is the latest weapon in the Bank’s long battle against deflation, which since the 1990s has discouraged the Japanese people from making substantial purchases because they expect prices to continue falling.
It comes amid declining industrial production and household spending, underscoring the fragile nature of Japan’s recovery.
“What’s important is to show people that the BoJ is strongly committed to achieving 2 percent inflation and that it will do whatever it takes to achieve it,” Kuroda said.
Japanese consumer inflation was just 0.1 percent in the year to December despite three years of aggressive money-printing by the central bank.
In response, Asian shares jumped and the yen fell against other currencies.
However a number of economists say they doubt the negative interest rate move will work. “We do not think negative rates are a game changer,” said Commerzbank strategist Esther Reichelt, in Frankfurt. “Pressure on the BoJ will mount to do even more in coming months to attain their inflation target.”
“It has gone on the defensive,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. “It made this decision not because it’s effective, but because markets are collapsing and it feels it has no other option.”
The policy was pioneered by the European Central Bank in June 2014 but had little effect on eurozone growth.