News

Bank of Japan slashes interest rates

The Bank of Japan (BoJ) has lowered its interest rates to -0.1%, an action that has surprised markets, in a bid to encourage borrowing [1].

The Bank made the decision to adopt negative interest rates in an attempt to protect the flagging economy from market volatility and fears over the global economy, following an economic slowdown in neighbouring China.

In a 5-4 vote, the Bank’s board imposed a 0.1% fee on deposits left with the BoJ [2].

This move is designed to encourage commercial banks to use excess reserves they keep with the central bank to lend to businesses. It’s similar to the precedent set by the European Central Bank in June 2014, in which multi-tier systems were used in Switzerland, Sweden and Denmark, which have negative rates of -0.75%, -1.1% and -0.65% respectively [3].

Governor for the BoJ, Haruhiko Kuroda, said the waning growth rate of the global economy was the main reason behind the move. “Japan’s economy continues to recover moderately, and the underlying price trend is improving steadily… 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 mind set” [4].

Asian shares jumped and the yen fell following the announcement, plunging more than ¥1.5 to ¥120.8 against the dollar [1].

The decision to lower interest rates came after the latest set of economic indicators pointed to another quarter of weak growth. Household spending and industrial production numbers for December both came below expectations, suggesting the economy had barely expanded in that period [5].

Although the news is unexpected, the decision has been applauded. Jesper Koll, CEO at WisdomTree Japan said: “I’m very happy with Governor Kuroda’s leadership today – adopting negative rates is exactly what was needed to re-assert the relentless, pro-active and pro-growth determination that underlies Abenomics” [2].

 

[1] Financial Times. ‘Bank of Japan adopts negative interest rates’. ft.com

[2] The Guardian. ‘Bank of Japan shocks markers by adopting negative interest rates’. theguardian.com

[3] Bloomberg. ‘Bank of Japan’s negative interest rate decision explained’. bloomberg.com

[4] BBC News. ‘Japan adopts negative interest rate in surprise move’. bbc.co.uk

[5] Telegraph. ‘Bank of Japan slashes interest rates into negative territory’. telegraph.co.uk