Date
23 March 2017
BOJ governor Haruhiko Kuroda says the economy is recovering but a deflationary mindset remains. Photo: Reuters
BOJ governor Haruhiko Kuroda says the economy is recovering but a deflationary mindset remains. Photo: Reuters

Bank of Japan shocks markets with negative interest rate

Japan’s central bank unexpectedly cut a benchmark interest rate below zero on Friday in another stunning move to revive the economy.

Asian shares rallied, the yen tumbled and sovereign bonds rallied after the Bank of Japan (BOJ) said it would charge for a portion of bank reserves parked with the institution, an aggressive policy pioneered by the European Central Bank (ECB).

“The BOJ will cut the interest rate further into negative territory if judged as necessary,” the bank said in a statement announcing the decision.

Japan is using a new weapon in its long battle against deflation or widespread falling prices, which since the 1990s have discouraged consumers from buying big or frequently because prices tend to fall.

Deflation is seen as the root of two decades of economic malaise.

BOJ governor Haruhiko Kuroda said the world’s third biggest economy is recovering moderately and the underlying price trend is rising 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”.

Kuroda had said as recently as last week that the bank was not thinking of adopting a negative interest rate policy for now, telling the Japanese parliament that further easing would likely take the form of an expansion of its massive asset-buying programme.

But in a narrow 5-4 vote, the BOJ’s policy board decided to charge a 0.1 percent interest on selected current account deposits that financial institutions hold with it.

The central bank said the move is aimed at forestalling the risk of global financial turbulence hurting business confidence and reviving the “deflationary mindset” it has been striving to banish with aggressive money printing.

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