Bank of Japan sets negative interest rate

JAPAN surprised financial markets yesterday by becoming the latest major central bank to take interest rates into negative territory.

The Bank of Japan said it would begin to charge to hold commercial banks’ money, cutting its rate from 0.1pc to -0.1pc. It is the latest attempt by policymakers to kick-start the economy three years after the government of Shinzo Abe launched an unprecedented assault on deflation and low growth.

The Bank of Japan has already embarked on the most ambitious programme of quantitative easing seen anywhere in the world, buying up assets to the tune of 80 trillion yen (£460bn) a year in government bonds.

The yen fell against the US dollar following the announcement, dropping by as much as 2.5pc to 121.69 yen to the dollar.

Central banks have increasingly taken recourse to negative rates, eight years after the onset of the financial crisis. The European Central Bank imposed a negative deposit rate in 2014, following Switzerland, Sweden and Denmark.

The Bank of England’s chief economist has suggested it too may need to impose negative rates to fight off the next recession.

But Japan’s ratesetters were divided over the move, voting by 5-4 in favour.

BoJ governor Haruhiko Kuroda said authorities were ready to embark on more rate cuts and expand its massive quantitative easing programme.

His comments are a departure from two weeks ago, suggesting market tur- moil and the collapsing price of oil has pushed down inflationary pressures.

“The intent was clearly to deliver maximum impact through surprise,” said James Smith at ING.

The BoJ downgraded its forecasts for inflation to 0.8pc this year, from earlier estimates of 1.4pc. Consumer prices inflation fell to 0.2pc in December, against a target of 2pc.

Economists have called for a more radical approach to smashing Japan’s “deflationary mindset”.

Adam Posen, a former Bank of England rate-setter, said Mr Kuroda’s moves were a welcome sign of intent, but Japanese businesses and the government needed to help drive up wages to stimulate growth.

“Monetary commitment alone appears to be insufficient,” he said.

Marcel Thieliant, at Capital Economics, said: “With the [BoJ] now having crossed the Rubicon, we think that any additional easing will take the form of further cuts in the interest rate on excess reserves rather than an expansion in asset purchases.”

The BoJ could even go as far as reducing its reliance on QE in favour of using interest rate tools to stimulate growth, said analysts.

The decision came after the latest economic indicators pointed to another quarter of weak growth for the world’s third largest economy. Household spending and industrial production in December were both below expectations, suggesting the economy barely expanded in the final quarter.

But the immediate impact of the first negative rate cut is likely to be limited, as it will only apply to new, rather than existing, reserves.