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Bank of Japan charges 'below zero' interest rates

Reuters
Filed on January 29, 2016
Bank of Japan charges below zero interest rates

(AP)

The -0.1 percent interest rate introduced by the BoJ means that banks parking their money with the central bank are actually charged for doing so.

 The Bank of Japan on Friday adopted a negative interest rate policy to spur lending and help drive inflation towards its two-percent target.

The -0.1 percent interest rate introduced by the BoJ means that banks parking their money with the central bank are actually charged for doing so.

By penalising the banks for hoarding their cash, the BoJ is giving them the incentive to loan the money out, thereby pumping more cash into the economy and, hopefully, boosting economic activity.

In 2014, the ECB became the first major central bank in the world to use negative interest rates.

The BoJ had already kept its key interest rate at near zero as part of the country's easy money policy - a key weapon in Prime Minister Shinzo Abe's "Abenomics" economic revival programme.

Low interest rates mean businesses and households are less inclined to leave their money in the bank, while at the same time more likely to borrow to spend and invest. This theoretically boosts economic activity and eventually pushes up prices.

Japan has suffered from years of deflation and Tokyo's efforts to pump up the economy have had limited results so far.

While falling prices, or deflation, might appear to be good for consumers, if they become entrenched buyers could delay purchases in the hope of even lower prices later. That in turn prompts companies to hold off investment.

Deflation is a trap that is very difficult to get out of, as demonstrated by the case of the Japanese economy, which has fought it off and on for two decades.

 ....................................................................................................................................................................

 The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Friday, stunning investors with another bold move to revive the economy as volatile markets and slowing global growth threaten its efforts to beat deflation.

Following are comments from BOJ Governor Haruhiko Kuroda at his post-meeting news conference:

ON PRICE RISKS, RATIONALE FOR NEGATIVE RATE:

"Japan's economy continues to recover moderately and the underlying price trend is improving steadily. But there's a risk recent further falls in oil prices, uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people's deflationary mindset.

"The BOJ decided to adopt negative interest rates ... to forestall such risks from materialising."

WATCHING FED, ECB:

We're of course carefully watching what the ECB and the Fed does. But today's steps are taken solely in response to Japan's economy and prices, as well as their risks.

HAVE MORE POLICY AMMUNITION:

"Today's steps don't mean that we've reached limits to our JGB buying. We added interest rates as a new easing tool to our existing QQE framework."

ON PROSPECT FOR FURTHER EASING STEPS:

"We won't hesitate taking additional (easing) steps by (expanding) the quantity, quality of money, as well as through interest rate (cuts) if needed to achieve our price target, while scrutinising risks to the economy and prices."

 





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