Japan surprised the world today by introducing negative interest rates in an attempt to boost its ailing economy. The Bank of Japan announced that it will apply a negative interest rate of minus 0.1 per cent to current accounts that financial institutions hold at the Bank.
The change to the benchmark rate, which does not apply to oridinary consumers, is the latest in a string of measures designed to revive Japan’s economy; rather than deposit money, it is hoped that the charge will instead encourage commercial banks to lend to businesses, stimulating activity in the economy.
The bank will introduce a multiple-tier system, which it notes some central banks in Europe (e.g. the Swiss National Bank) have already put in place. Specifically, it will adopt a three-tier system in which the outstanding balance of each financial institution’s current account at the Bank will be divided into three tiers, to each of which a positive interest rate, a zero interest rate, or a negative interest rate will be applied.
It also said it would “cut the interest rate further into negative territory if judged as necessary”.
The decision was narrowly voted through at a meeting on Friday by five votes to four. Indeed, the overriding market sentiment was that Japan would be too cautious to follow the eurozone into negative interest rate territory. The surprise reaction therefore sent the Yen tumbling, with the US dollar surging to a six-week high against the Japanese currency of 121.495 Yen, according to Reuters. The Australian dollar rose almost per cent against the Yen, reports ABC.
The weakening Japanese Yen has sparked fears among some that a currency war is brewing. Indeed, countries intentionally weakening their currencies can theoretically boost exports, which can help to stimulate economies. Last year, the weak Yen was good news for the country’s real estate, encouraging investment from overseas, such as Hong Kong, where property prices are much more expensive.
Since then, though the Yen has begun to rise again, while the stock market has dropped and inflation has stayed low, a combination that has placed increase pressure upon the bank’s governor, Haruhiko Kuroda.
The announcement also follows a report from CBRE that predicted Japanese investment in overseas property would increase over the coming years, as investors seek to diversify away from their troubled economy in markets with stronger growth prospects. This trend was forecast despite investors facing the headwind of expensive costs brought on by unfavourable currency exchange rates.
Martin Schulz of the Fujitsu Institute in Tokyo told the BBC that the impact of today’s decision may not be very sizeable, because the economic climates in Europe and Japan are different, as the eurozone faces a financial crisis and Japan is experiencing slow growth.
“In Japan, credit didn’t expand not because banks were unwilling to lend but because businesses didn’t see the investment perspective to borrow. Even with negative interest rates, this situation will not change,” he commented.
“Businesses don’t need money – they need investment opportunities. And that can only be achieved by structural reforms, not by monetary policy.”Google+