Japan Negative Interest Rates: Negative Interest Rate

Published: January 31, 2016

Japan Negative Interest Rates: Negative Interest Rate, The latest monetary policy announced by the Bank of Japan is apparently the expression of its strong determination to achieve a commodity price target and ensure the Japanese economy’s departure from deflation.

The central bank’s Policy Board decided to introduce a negative interest rate, an unusual policy, as an additional monetary easing measure. Under the policy, the BOJ will cut the interest rate for more than a certain amount of current account deposits made with it by commercial banks to minus 0.1 percent and charge a 0.1 percent handling fee for them.

“We will change the deflationary mind-set by demonstrating we will do whatever is necessary,” BOJ Gov. Haruhiko Kuroda stressed at a press conference. Financial markets responded favorably to the central bank’s surprise decision with the benchmark Nikkei average soaring nearly 500 points.

International financial markets have descended into chaos since the beginning of this year, heightening anxiety over the future of the global economy. Considering that, the BOJ should be praised for taking the flexible and prompt action.

The negative interest rate policy aims to encourage private financial institutions to lend money more actively and activate corporate investment in plants and equipment, and other business activities. The policy has been already introduced by the European Central Bank and others.

However, some observers said the policy’s efficacy is limited. Major companies with a huge amount of internal reserves have not refrained from investment due to lack of funds.

There is also concern that the policy might squeeze profits of financial institutions that have to pay handling fees to the central bank. Such concern apparently made a vote for the decision a very close call.

The reduction of interest rates in general could be expected to activate investors who are wiling to take risks for profits, prevent the yen’s appreciation and boost stock prices.

The policy would help small and medium-sized businesses and venture companies raise funds more smoothly, and will boost investment in new business ventures.

Of course, financial policy alone is unlikely to take the Japanese economy out of deflation. The government should develop and carry out its growth strategy quickly while the BOJ buoys the national economy.

Actions of central banks in each country have significance to calm the turbulence of markets.

There is concern for the future of emerging economies. Financial authorities of Japan, the United States and European countries in particular must understand the necessity for developed countries to lead the global economy and take every means possible to have dialogue with markets. Enhancement of policy coordination is also essential among them.

European Central Bank President Mario Draghi last week suggested an additional monetary easing measure might be taken in March. Introduction of the negative interest rate policy by the BOJ might be part of policy coordination in line with this.

But the attitude of the U.S. Federal Reserve Board is a cause of concern.

The Fed has not denied the possibility that an additional rate increase will be decided at a meeting of the Federal Open Market Committee in March. It remains unclear how fast the Fed aims to increase the interest rate.


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