The Bank of Japan has slashed interest rates to minus 0.1 per cent in a move that shocked markets and adds a new dimension to its record monetary stimulus.
Its decision reasserts the BoJ’s willingness to take aggressive action to drive inflation to 2 per cent and highlights its concerns about the economic slowdown in China and a rise in the yen.
However, the BoJ will keep paying positive interest on the vast majority of bank reserves, so the move is unlikely to have much direct effect on the sluggish Japanese economy.
BoJ governor Haruhiko Kuroda has been on a three-year quest to rescue Japan from decades of on-off deflation with a huge programme of monetary stimulus. However, inflation was mired at 0.2 per cent on a year ago in December, and there are signs of a weak wage round this spring.
Central banks have been delving into negative territory in a bid to stimulate economic growth. The European Central Bank became the first major central bank to venture below zero in June 2014 and now charges banks 0.3 per cent to hold their cash overnight.
The yen plunged more than Y1.5 to Y120.3 against the dollar in the wake of the move, while the Topix stock index rose more than 1 per cent to trade at 1,411 at lunchtime in Tokyo.
Showing its willingness to expand the policy further, the BoJ said it “will cut the interest rate further into negative territory if judged necessary”.
Voting for the decision by a narrow majority of five to four, the BoJ said it was moving because of falling oil prices and China’s slowdown rather than any economic weakness at home.
“For these reasons, there is an increasing risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively affected,” the bank said in its statement.
“The bank will lower the short end of the yield curve by slashing its deposit rate on current accounts into negative territory and will exert further downward pressure on interest rates across the entire yield curve.”
However, the BoJ will use a complicated three-tier system, which makes the negative rate much weaker than comparable moves by the ECB and other European central banks.
Crucially, it will only pay negative rates on any new bank reserves resulting from its programme of asset purchases. All existing bank reserves — which amount to about $2.5tn or 50 per cent of gross domestic product — will continue to be paid interest at 0.1 per cent.
The growth of negative-yielding sovereign bonds and sub-zero policy rates by central banks means that investors are paying to lend to governments while banks are being charged a penalty to park their surplus cash
That means there is unlikely to be any impact on bank profits or bank depositors in the short term. The negative interest rate will only have an impact over time as the BoJ keeps buying assets and creating new bank reserves.
The move will add to Mr Kuroda’s reputation for surprises, suddenly adopting policies he has vehemently denied were even possible. Eight days ago he told parliament the BoJ was “not seriously considering” a negative rate.
Voting on the decision suggests the BoJ policy board was seriously divided. New member Yukitoshi Funo, a former Toyota executive, supported the move. Sayuri Shirai, who has backed easing in the past, voted against.
Ms Shirai said the move could be misunderstood as implying the BoJ had reached a limit on asset purchases and the complicated system could cause confusion.
The BoJ kept asset purchases unchanged at Y80tn a year but pushed back its outlook for achieving its 2 per cent inflation goal by another six months. It is now aiming for the first half of fiscal 2017 — so between March and October of that year.
BoJ’s negative rates: what you need to know
The Bank of Japan has adopted negative interest rates and pushed back the timeframe for its 2 per cent inflation target — a key goal in the economics reform programme known as Abenomics. Here are the key moves announced today:
Negative interest rates
The BoJ is diverging from the US Fed and instead following the ECB and central banks in other European nations such as Denmark and Switzerland into negative territory. It cut the benchmark rate to -0.1 per cent and does not rule out further cuts.
For the trillions of yen already parked by banks at the BoJ — not at all, it turns out. Average rates remain positive; the new rate will only apply to the next bout of QE. Even this small step created a big schism at the BoJ, with those in favour carrying negative interest rates by a slim 5 to 4 majority.
The BoJ has also chosen not to expand its quantitative and qualitative easing programme, relying on a negative interest rate environment to give current easing a boost.
Delayed inflation target timeframe
The timeframe for hitting 2 per cent inflation has been extended by at least six months — with the blame falling on oil. The scourge of deflation will not now be truly slain until the first half of fiscal 2017, or between March and October of that year. Delays of course are par for the course: when first outlined in 2013, the goal was to hit 2 per cent by 2015.
Reduced interim inflation target
For the year to March 2017 the BoJ forecasts inflation at 0.8 per cent, down from the original 1.4 per cent pace. That’s quite a drop and shows the scale of the task facing Japan. Reflecting the magnitude of what it has just announced — and how the devil well and truly rests in the detail — the BoJ has also released a handy primer.