Bank of Japan to Introduce Negative Interest Rate

Tokyo, Jan 30 (IANS) The Bank of Japan (BOJ) surprised markets by announcing that it would introduce a negative interest rate to show resolution in the fight against prolonged deflation.

The proposed remedy, however, may hold few substantial cures for Japanese economic structural woes and may trigger other currencies' competitive devaluation, which would ultimately send stocks lower here and inhibit capital expenditure, the exact opposite of the central's ultimate reflationary goal, Xinhua reported.

Japan's top central banker Haruhiko Kuroda on Friday said: "By adding an option for easing from the perspective of interest rates, we will make full use of easing measures with three dimensions, quantity, quality and interest rates."

Although the BOJ chief was reluctant to follow suit when the European Central Bank plunged into negative interest rates, he hoped that Friday's "shock move" will suddenly motivate lending and thus spending, so as to actualise policy effects at the earliest possible juncture.

The central bank planned to introduce the minus interest rate from next month and said it will further cut the interest rate if necessary.

By doing so, the bank is hedging that commercial banks will be further incentivised to lend to businesses to promote widespread investment and growth, and put the bank back on track to hit its two percent inflation target, although the time frame for this has once again been pushed back.

But the danger of this gamble is that the BOJ has no means to ensure that the funds flowing out from commercial banks will be successfully injected into the real economy.

If not, the market will soon erase surging gains made after the surprise announcement and return to a protracted spell of retreat into territory.

This, more so if a "deflationary mindset" continues in businesses and households here, and other countries' currencies are forced lower and the yen used as a safe haven, which drives stocks lower, pummels Japan's export sector, which in turn impacts production and ensures businesses hold their purse strings tighter.

Furthermore, the policy, to some extent, exposed the fact that the BOJ's previous monetary easing measures have failed to help bolster the banks reflationary efforts, while the meagre rise in the consumer prices index in 2015 and the delayed time frame of achieving the inflation goal, has proved that the country may possibly re-enter its well known deflationary quagmire.

The BOJ, in terms of its monetary base, decided in the meantime to continue to increase the base at an annual pace of 80 trillion yen ($674.48 billion) through aggressive purchases of government bonds.

But analysts here pointed out that the introduction of the negative interest rate showed that the BOJ's capability to purchase government bonds has reached its limit since commercial banks here will be reluctant to deposit cash in the BOJ and make it more difficult to continue such purchases.

The BOJ's dramatic move temporarily halted the Japanese yen's appreciation and forced its devaluation, with the currency fast retreating from the 118-yen level to the 121-yen zone versus its US counterpart, after the BOJ's latest easing measures were announced on Friday.

However, a constantly depreciated yen will finally damage assets held by common Japanese people.

Meanwhile, another issue of the minus interest rate that needs to be focused on, involves recent policy moves by the US Federal Reserve raising its key interest rate and the European Central Bank hinting it will further ease its policy this spring.

The BOJ's move triggering the yen's retreat will exert more pressure on other central banks to also ease their currencies and the result could end up severely hampering the tepid recovery of both regional and global economies.